International Financial Management Exam 2

Online çal1_: https://quizlet.com/_6k5e1

1. Which of the following best describes currency op- But not the obliga-
tions sold through an options exchange. They grant tion, to buy or sell
the buyer a right and are standard-
ized.

2. Forward contracts contain: A commitment to

the owner, and
can be tailored to
the desire of the
owner.

3. If your firm expects the euro to substantially depreci- Selling; selling

ate, it could speculate by _______ euro call options
or _______euros forward in the forward exchange
market.

4. When you purchase ________, there is no obligation Put options; for-

on your part; however, when you purchase ________, ward contracts
there is an obligation on your part.

5. The greater the variability of a currency, the ________ Greater; greater

will be the premium of a call option on this currency,
and the ________ will be the premium of a put option
on this currency, other things equal.

6. The shorter the time to the expiration date for a cur- lower, lower
rency, the ________ will be the
premium of a call option, and the ________ will be the
premium of a put option, other things equal.

7. Assume that a speculator purchases a put option -$1,562

on British pounds (with a strike price of $1.50) for
$.05 per unit. A pound option represents 31,250 units.
Assume that at the time of the purchase, the spot
rate of the pound is $1.51 and continually rises to
$1.62 by the expiration date. The highest net profit
possible on the option for the speculator based on
the information above is:

8. Which of the following is true?

1 / 18
 International Financial Management Exam 2
Online çal1_: https://quizlet.com/_6k5e1
The futures mar-
ket is primarily
used by specula-
tors while the for-
ward market is pri-
marily used for
hedging.

9. If you expect the euro to depreciate, it would be ap- Sell a euro call
propriate to ________ for speculative purposes. and buy a euro put

10. If you expect the British pound to appreciate, you Purchasing; sell-
could speculate by ________ pound call options or ing
________ pound put options.

11. Which of the following is correct about a currency a. The lower the
option, other things equal? exercises price
relative to the spot
rate, the greater
the value of a call
option.

12. Assume no transactions costs exist for any futures or Be about the
forward contracts. The price of British pound futures same as the
with a settlement date 180 days from now will: 180-day forward
rate.

13. A firm sells a currency futures contract and then Buying an iden-
decides before the settlement date that it no longer tical futures con-
wants to maintain such a position. It can close out its tract.
position by:

14. If the spot rate of the euro increased substantially Increase substan-
over a one-month period, the tially
futures price on euros would likely
____________over that same period.

15. A U.S. firm is bidding for a project needed by the Buying franc call
Swiss government. The firm will not know if the bid is options.
accepted until three months from now. The firm will
2 / 18
 International Financial Management Exam 2
Online çal1_: https://quizlet.com/_6k5e1
need Swiss francs to cover expenses but will be paid
by the Swiss government in dollars if it is hired for
the project. The firm can best insulate itself against
exchange rate exposure by:

16. The premium on a pound put option is $.03 per unit. $1.57; $1.57
The exercise price is $1.60. The break-even point is
________ for the buyer of the put, and ________ for
the seller of the put. (Assume zero transactions costs
and that the buyer and seller of the put option are
speculators.)

17. You purchase a call option on pounds for a premium -$.02

of $.03 per unit, with an exercise price of $1.64; the
option will not be exercised until the expiration date,
if at all. If the spot rate on the expiration date is $1.65,
your net profit per unit is:

18. You purchase a put option on Swiss francs for a None of the
premium of $.02, with an exercise price of $.61. The above.
option will not be exercised until the expiration date,
if at all. If the spot rate on the expiration date is $.58,
your net profit per unit is:

19. You are a speculator who sells a call option on Swiss $.01
francs for a premium of $.06, with an exercise price
of $.64. The option will not be exercised until the
expiration date, if at all. The spot rate of the Swiss
franc is $.69 on the expiration date, your net profit per
unit is:

20. You are a speculator who sells a put option on Cana- None of the
dian dollars for a premium of $.03 per unit, with an above.
exercise price of $.86. The option will not be exercised
until the expiration date, if at all. If the spot rate of the
Canadian dollar is $.78 on the expiration date, your
net profit per unit is:

21. Macomb Corporation is a U.S. firm that invoices some Sell futures con-
of its exports in Japanese yen. If it expects the yen to tracts on yen
3 / 18
 International Financial Management Exam 2
Online çal1_: https://quizlet.com/_6k5e1
depreciate, it could ________ to hedge the exchange
rate risk on those exports.

22. A call option on Australian dollars has a strike (exer- In the money.
cise) price of $.56. The present exchange rate is $.59.
This call option can be referred to as:

23. A put option on British pounds has a strike (exercise) Out of the money
price of $1.48. The present exchange rate is $1.55.
This put option can be referred to as:

24. A U.S. corporation has purchased currency put op- $84,000

tions to hedge a 100,000 Canadian dollar (C$) re-
ceivable. The premium is $.01 and the exercise price
of the option is $.75. If the spot rate at the time of
maturity is $.85, what is the net amount received by
the corporation if it acts rationally?

25. A U.S. corporation has purchased currency call op- $95,000

tions to hedge a 62,500 British pounds payable. The
premium is $.02 per unit and the exercise price of
the option is $1.50. If the spot rate of the pound at
maturity is $1.65, what is the total amount paid by the
corporation if it acts rationally?

26. Your company expects to receive 5,000,000 Japanese $47,500

yen 60 days from now. You decide to hedge your
position by selling Japanese yen forward. The current
spot rate of the yen is $.0089, while the forward rate
is $.0095. If the spot rate turns out to be $.0090 in
60 days, how many dollars will you receive for the
5,000,000 yen at that time?

27. Due to ________, market forces should realign the Covered interest
relationship between the interest rate differential be- arbitrage
tween two countries and the forward premium or dis-
count on the exchange rate between their two curren-
cies.

28.
4 / 18
 International Financial Management Exam 2
Online çal1_: https://quizlet.com/_6k5e1
Due to ________, market forces should realign the Locational arbi-
spot rate of a currency among banks. trage

29. Due to ________, market forces should realign the Triangular arbi-
difference between the cross exchange rate for a cur- trage
rency from, say points A and B, and the quoted rate
for the same currency at point C.

30. If interest rate parity holds, then ________ is not fea- Covered interest
sible. arbitrage

31. In which case will locational arbitrage be most likely Bid price for a cur-
feasible? Bank A's: rency is greater
than Bank B's ask
price for the cur-
rency

32. Assume that the interest rate in for Currency X is Exhibit a discount.
much higher than the U.S. interest rate. According to
Interest Rate Parity Theory, the forward rate of Cur-
rency X should:

33. If interest rate is higher in the U.S. than in the U.K. and Arbitrage flow of
the forward rate of the British pound is the same as funds takes place
its spot rate, then: from U.K. to U.S.

34. Assume that U.S. investors are benefiting from cov- Downward pres-
ered interest arbitrage due to high interest rate on sure on the euro's
euro. Which of the following adjustments should re- forward rate.
sult from covered interest arbitrage?

35. Assume that a U.S. firm can invest funds for one year Spot rate of peso
in the U.S. at 12% or invest funds in Mexico at 14%. increases; forward
The spot rate of the peso is $.10 while the one-year rate of peso de-
forward rate of the peso is $.10. If a U.S. firm uses cov- creases
ered interest arbitrage, which of the following price
adjustments should result?

36. Assume the bid rate of a New Zealand dollar is $.33 $15,385
while the ask rate is $.335 at Bank X. Assume the bid
5 / 18
 International Financial Management Exam 2
Online çal1_: https://quizlet.com/_6k5e1
rate of the New Zealand dollar is $.32 while the ask
rate is $.325 at Bank Y. Given this information what
would be your gain if you use $1,000,000 and execute
locational arbitrage? That is, how much will you end
up with over and above the $1,000,000 you started
with?

37. Based on interest rate parity, the larger the degree Larger will be the
by which the foreign interest rate exceeds domestic forward discount
interest rate, the: of the foreign cur-
rency.

38. Assume the following information. You have $1,024,000

$1,000,000 to invest.
Current spot rate of pound = $1.30
90-day forward rate of pound = $1.28
3-month deposit rate in U.S. = 2.25%
3-month deposit rate in U.K. = 4%
If you use covered interest arbitrage for a 90-day
investment, what will be the amount of U.S. dollars
you will have after 90 days?

39. Assume the following information: 10.63%

Current spot rate of New Zealand dollar = $.41
Forecasted spot rate of New Zealand dollar 1 year
from now = $.43
One year forward rate of the New Zealand dollars =
$.42
Annual interest rate on New Zealand dollars = 8%
Annual interest rate on U.S. dollars = 9%
Compute the return from covered interest arbitrage
by a U.S. investor with $500,000 to invest.

40. If annualized nominal interest rates in the US and $1.0022

Switzerland are 12% and 8% respectively and the
90-day forward rate for the Swiss franc is $1.0218, at
what current spot rate will interest rate parity hold?

41. Assume the following information: 12.35%

Spot rate today of Swiss franc = $.60
6 / 18
 International Financial Management Exam 2
Online çal1_: https://quizlet.com/_6k5e1
1-year forward rate as of today for Swiss franc = $.63
Expected spot rate 1 year from now = $.64
Rate on 1-year deposits denominated in Swiss francs
= 7%
Rate on 1-year deposits denominated in U.S. dollars
= 9%
From the perspective of a U.S. investor with
$1,000,000, covered interest arbitrage would yield a
rate of return of ________.

42. Assume the British interest rates are higher than U.S. Upward; down-
rates, and that the spot rate for the pound equals ward
the forward rate, then covered interest arbitrage puts
______ pressure on the pound's spot rate, and ______
pressure on the pound's forward rate.

43. Assume the following information. You have $1,020,500

$1,000,000 to invest.
Current sport rate of pound = $1.60
90-day forward rate of pound = $1.57
3-month deposit rate in U.S.= 3%
3-month deposit rate in U.K.= 4%
If you use covered interest arbitrage for a 90-day
investment, what will be the amount of U.S. dollars
you will have after 90 days?

44. Assume the following information: 5.59%

Current spot rate of Australian dollar=$.64
Forecasted spot rate of Australian dollar 1 year from
now = $.59
1-year forward rate of Australian dollar=$.62
Annual interest rate for Australian dollar deposit =9%
Annual interest rate in U.S.=6%
Given the above information, the return from covered
interest arbitrage by a U.S.
investor with $500,000 to invest is: ________.

45. Given that annual deposit rates for Dollars and Euros $1.5415
are 6% and 4% respectively for the next 5 years. If
the current spot rate of the Euro is $1.4015, obtain
7 / 18
 International Financial Management Exam 2
Online çal1_: https://quizlet.com/_6k5e1
the implied rate for the Euro five years from now if
International Fisher Equation holds exactly.

46. According to interest rate parity (IRP), the: Forward rate dif-
fers from the spot
rate by a suffi-
cient amount to
offset the interest
rate differential be-
tween two coun-
tries.

47. Assume that interest rate parity (IRP) holds. The Mexi- Forward rate dif-
can interest rate is 5%, and the U.S. interest rate is 8%. fers from the spot
Subsequently, the U.S. interest rate decreases to 7%. rate by a sufficient
If IRP is to continue to hold, then the peso's forward amount to offset
________ will ________. the interest
rate differen-
tial between two
countries.

48. The Purchasing Power Parity (PPP) suggests that a Depreciate if

home currency will: home inflation rate
exceeds foreign
inflation rate.

49. The International Fisher Equation (IFE) suggests that Depreciate if

a home currency will: home interest rate
exceeds foreign
interest rate.

50. Because there are a variety of factors in addition to Reduce the prob-
inflation that affect exchange rates, this will tend to: ability that PPP
shall hold.

51. According to the IFE, if British interest rates exceed The British pound
U.S. interest rates, will depreciate
against the dollar.

52. The International Fisher Equation (IFE) states that:

8 / 18
 International Financial Management Exam 2
Online çal1_: https://quizlet.com/_6k5e1
Nominal interest
rate differential be-
tween two coun-
tries is approxi-
mately equal to
the rate of change
in exchange rate
between their cur-
rencies.

53. If interest rates on the euro are consistently below The value of the
U.S. interest rates, then for the International Fisher euro will appre-
Equation (IFE) to hold, ciate against the
dollar.

54. Under Purchasing Power Parity, the future spot ex- The inflation differ-
change rate is a function of ential
the initial spot rate in equilibrium and:

55. According to the Fisher Equation, if U.S. investors 8.15 %

expect a 5% rate of domestic inflation over one year
and require a 3% real return on investments over one
year,
the exact nominal interest rate on one-year U.S. trea-
sury security would be:

56. Assume that the Fisher Equation holds approximate- Equal to their infla-
ly for domestic and foreign tion differential.
countries. If investors in all countries require the
same real return, then the difference in nominal inter-
est rates between any two countries is:

57. Assume U.S. and Swiss investors require a real rate Appreciate; 2%
of return of 3%. Assume the
nominal U.S. interest rate is 6% and the nominal
Swiss rate is 4%. According to the International Fish-
er Equation, the Swiss franc will _____ by about
______.

58. Higher; weaken

9 / 18
 International Financial Management Exam 2
Online çal1_: https://quizlet.com/_6k5e1
According to the International Fisher Equation and
the Generalized Fisher Equation, if Venezuela has a
much higher nominal interest rate than other coun-
tries, its inflation rate will be ______ than other coun-
tries, and its currency will _______.

59. According to the "law of one price," The price of an

identical product
should be equal
across markets
when measured in
a common curren-
cy.

60. The ________ is also referred to as the "law of one Absolute Purchas-
price." ing Power Parity

61. Latin American countries have historically experi- Purchasing power

enced relatively high inflation rates and their curren- parity
cies have weakened accordingly. This experience is
consistent with the concept of:

62. Assume that during a given period the nominal inter- $1.47
est rate in Cyprus was 7% while the nominal interest
rate in the US was 5%. The spot rate for the Cyprus
pound ($/CYP) started at $1.50. At the end of the
period, according to the IFE,
the Cyprus pound should adjust to a new level of:

63. Translation exposure reflects the exposure of a Financial state-

firm's: ments to ex-
change rate fluctu-
ations.

64. Transaction exposure reflects the exposure of a Ongoing interna-

firm's: tional transactions
to exchange rate
fluctuations.

65. Economic exposure refers to the exposure of a firm's:

10 / 18
 International Financial Management Exam 2
Online çal1_: https://quizlet.com/_6k5e1
Future cash flows
to exchange rate
fluctuations.

66. Which of the following operations benefits from a Borrowing imme-

continuing appreciation of a firm's local currency? diately in a foreign
currency and con-
verting the funds
to the local curren-
cy investment.

67. Economic exposure can affect: Both MNC and

Purely domestic
firms.

68. Generally, MNC with less foreign costs than foreign Favorably;
revenue will be _____ affected by a _____ foreign stronger or
currency Adversely; weaker

69. A firm produces goods for which substitute goods None of the above
are produced in other countries. An appreciation of
the firm's local currency should:

70. A firm produces goods for which substitute goods None of the above
are produced in other countries. A depreciation of the
firm's local currency should:

71. Which of the following is not a form of exposure to Credit exposure /

exchange rate fluctuations? Transnational ex-
posure

72. ________ is not a determinant of translation expo- The local (domes-

sure. tic) earnings of the
MNC

73. Assume the following information: $240,000

U.S. deposit rate for 1 year = 11%
U.S. borrowing rate for 1 year =12%
Swiss deposit rate for 1 year = 8%
Swiss borrowing rate for 1 year = 10% Swiss forward
11 / 18
 International Financial Management Exam 2
Online çal1_: https://quizlet.com/_6k5e1
rate for 1 year = $.40
Swiss franc spot rate = $.39
Also assume that a U.S. exporter denominates its
Swiss exports in Swiss francs and expects to receive
SF600,000 in 1 year. Using the information above,
what will be the approximate value of these exports
in 1 year in U.S. dollars given that the firm executes a
forward hedge?

74. Assume the following information: $236,127

U.S. deposit rate for 1 year = 11%
U.S. borrowing rate for 1 year = 12%
New Zealand deposit rate for 1 year = 8%
New Zealand borrowing rate for 1 year = 10%
New Zealand dollar forward rate for 1 year = $.40
New Zealand dollar spot rate = $.39
Also assume that a U.S. exporter denominates its
New Zealand exports in NZ$ and expects to receive
NZ$600,000 in 1 year. Using the information provided,
what will be the approximate value of these exports
in 1 year in U.S. dollars given that the firm executes a
money market hedge?

75. If a U.S. firm desired to lock in the maximum amount it Purchasing euro
would have to pay for its net payables in euros but still call options
wanted to be able to capitalize if the euro depreciates
substantially against the dollar by the time payment
is to be made, the most appropriate hedge would be:

76. If a U.S. firm desired to lock in a minimum rate at Purchasing yen

which it could sell its net put options.
receivables in Japanese yen but wanted to be able to
capitalize if the yen appreciates substantially against
the dollar by the time payment arrives, the most ap-
propriate hedge would be:

77. Use the following information to calculate the dollar None of the above
cost of using a money market
hedge to hedge 200,000 pounds of payables due in
180 days. Assume the firm has no excess cash. As-
12 / 18
 International Financial Management Exam 2
Online çal1_: https://quizlet.com/_6k5e1
sume the spot rate of the pound is $2.02, the 180-day
forward rate is $2.00, the British interest rate is 5%,
and the U.S. interest rate is 4% over the 180- day
period.

78. A firm has 1,000,000 euro receivables due in 30 days, Sell euros for-
and is certain that the euro will depreciate substan- ward.
tially over time. Assuming that the firm is correct, the
ideal strategy for the firm is to:

79. A MNC will receive SF1,000,000 in 30 days. Use the $590,000

following information to
determine the total dollar amount received (after ac-
counting for the option premium) if the firm purchas-
es and exercises a put option:

80. Assume that Parker Company will receive SF200,000 $96,914

in 360 days. Assume the following interest rates:

81. The forward rate of the Swiss franc is $.50. The spot $98,769
rate of the Swiss franc is $.48. The following interest
rates exist:

82. Your company will receive C$600,000 in 90 days. The $480,000 in 90

90-day forward rate for days
Canadian dollar is $.80. If you use a forward hedge,
you will receive:

83. 83. A call option exists on British pounds with an $1,106,000

exercise price of $1.60, 90-day expiration date, and a
premium of $.03 per unit. A put option also exists on
British pounds with an exercise price of $1.60, 90-day
expiration date, and a premium of $.02 per unit. You
plan to purchase options to cover your future receiv-
ables of 700,000 pounds in 90 days. You will exercise
the option in 90 days (if at all). You observe the spot
rate of the pound to be $1.57, 90 days later. Determine
the amount of dollars to be received, after accounting
for the option premium.

13 / 18
 International Financial Management Exam 2
Online çal1_: https://quizlet.com/_6k5e1
84. Assume that Smith Corporation needs to purchase $344,000
200,000 British pounds in 90
days. A call option exists on British pounds with an
exercise price of $1.68, 90-day expiration date, and a
premium of $.04. A put option also exists on British
pounds, with an exercise price of $1.69, 90-day ex-
piration date, and a premium of $.03. Smith Corpo-
ration plans to purchase options to cover its future
payables. It will exercise the option in 90 days (if at
all). The spot rate of the pound turns out to be $1.76
in 90 days. Determine the dollar cost of the payables,
including the cost of the option.

85. Which of the following is an example of economic An increase in

exposure? the dollar's val-
ue hurts a U.S.
firm's domestic
sales because for-
eign competitors
are able to in-
crease their sales
to U.S. customers.

86. Any restructuring of operations that ________ the Reduces; reduce

difference between a foreign currency's inflows and
outflows may ________ economic exposure.

87. If an exporter sells his/her accounts receivables off to Factoring.

another firm that becomes responsible for obtaining
payments from the various importers. This reflects:

88. If a bank acknowledges that it will make payments on Letter of credit.

behalf of a beer importer after the beer is delivered to
the importer. This reflects the use of:

89. An importer issues a promissory note to pay for the Letter of credit
imported capital goods over a period of five years.
The notes are extended to an exporter who sells them
at a discount to a bank. This reflects:

14 / 18
 International Financial Management Exam 2
Online çal1_: https://quizlet.com/_6k5e1
90. An exporter is willing to send goods to the importer, Accounts receiv-
on account, without a guaranteed payment by the able financing.
bank. The bank provides a loan to the exporter that
is backed by the value of the exported good. This
reflects:

91. A firm that sells products through __________ can Foreign Sales
reduce (used to be able to reduce) corporate taxes on Corporation (FSC)
income generated from foreign sales.

92. A ________ provides a summary of freight charges Bill of lading

and conveys title to the
merchandise.

93. Which of the following payment terms provides the Prepayment.

supplier with the greatest degree of protection?

94. With _____, the exporter ships the goods to the im- A consignment
porter while still retaining actual title to the merchan- arrangement
dise.

95. With _____, the exporter ships the goods to the im- Factoring
porter while still retaining actual title to the merchan-
dise.

96. A bill of exchange requesting the bank to pay the face Sight draft.
amount upon presentation of
a document is a:

97. A bill of exchange requesting a bank to pay the face Time draft.
amount at a future date is a:

98. An exchange of goods between two parties under two Counter pur-
distinct contracts expressed in monetary terms are: chase.

99. Who bears the payment risk in a letter of credit? issuing bank or
confirming bank

100. A banker's acceptance is a draft drawn on and accept- A bank

ed by ________.
15 / 18
 International Financial Management Exam 2
Online çal1_: https://quizlet.com/_6k5e1

101. Derivatives are used in the following ways except: None of the above

102. Which of the following is not true concerning regula- None of the above
tion of derivatives in the U.S.?

103. Which of the following is not a feature of the forward Contracts usually
market? reversed prior to
maturity

104. Unlike the ________; ___________ are traded on or- Swaps; Forwards
ganized exchanges and are
marked to the market.

105. Similar to the ________; __________ are agreements Forwards; Futures

embodying obligation to buy
or sell an asset or commodity for future delivery and
settlement.

106. The ____hedge is not a technique used to eliminate Index

transaction exposure by
multinational firms.

107. Assume that IRP holds. The U.S. five-year interest rate $.174
is 5% per year while the
Mexican five-year rate is 8% per year. If today's spot
rate of the peso is $.20, what is the approximate
five-year forecast of the peso's spot rate using the
five year forward rate?

108. If interest rate parity holds and the forward rate is International Fish-
expected to be an unbiased estimate (predictor) of er Equation holds
the future spot rate, then:

109. Part A: Call and put options premiums are affected by High; High; Low
the level of existing spot price relative to the strike
price. A ____ spot price relative to the strike price
results in relatively ____ premium for a call option but
a relatively ____ premium for a put option.
Part B: Call and put options premiums are affected by
the level of existing spot price relative to the strike
16 / 18
 International Financial Management Exam 2
Online çal1_: https://quizlet.com/_6k5e1
price. A ____ spot price relative to the strike price
results in relatively ____ premium for a call option but
a relatively ____ premium for a put option.

110. A U.S. corporation has purchased currency put op- $97,000.

tions to hedge a 100,000 Canadian dollar (C$) receiv-
able. The premium is $.02 per unit and the exercise
price of the option is $.94. If the spot rate at the time
of maturity is $.99, what is the net amount received
by the corporation if it acts rationally?

111. A U.S. corporation has purchased currency call op- $36,400

tions to hedge a 70,000 pound payable. The premium
is $.02 and the exercise price of the option is $.50.
If the spot rate at the time of maturity is $.65, what
is the total amount paid by the corporation if it acts
rationally?

112. If you have bought the right to sell, you are a: Put buyer.

113. Your company expects to pay 5,000,000 Japanese yen $47,500

90 days from now. You decide to hedge your position
by buying Japanese yen forward. The current spot
rate of the yen is $.0089, while the forward rate is
$.0095. You expect the spot rate in 90 days to be
$.0090. How many dollars will you need to meet your
obligation 90 days from now?

114. A speculator sells a put option on Canadian dollars -$2500

for a premium of $.03 per unit. with an exercise price
of $.98. The size of the option contact is C$50,000 and
will not be exercised until expiration if at all. If the spot
rate for Canadian dollar is $.90 on at expiration, the
net profit for the speculator is:

115. The purchase of a currency put option would be Company expects

appropriate for a U.S company under which of the to collect a foreign
following? currency accounts
receivable in six
months
17 / 18
 International Financial Management Exam 2
Online çal1_: https://quizlet.com/_6k5e1

116. Any type of contractual arrangement calling for the Forward

delivery (and settlement) of a good or service at a
future date at a price agreed upon at the initiation is
a /an ________ contract.

117. If a contract contains a promise that a specified Forward contract

amount of foreign currency will be delivered on
a specified date in the future, the contract is a
__________

118. If a contract contains a promise that standardized Futures contract

units of foreign currency will be delivered on a spec-
ified date in the future, the contract is a

119. If the interest rate on a deposit in the U.K. pound is 4%

6% per year, and the pound is expected to depreciate
against the U.S. dollar by 2% , what does the interest
rate parity theory imply about the interest rate on a
deposit in U.S. dollar?

120. Assume that the bid rate for Australian dollar $.60 $1639.30
while the ask rate is $.61 at Bank A. Also assume that
the bid rate for the Australian dollar is $.62 while the
ask rate is $.625 at Bank B. What would be your profit
if have $100,000 and you execute locational arbitrage
?

18 / 18