Assume the bid rate of a Swiss franc is $.57 while the ask rate is $.579 at Bank
ID: 2820118 • Letter: A
Question
Assume the bid rate of a Swiss franc is $.57 while the ask rate is $.579 at Bank X. Assume the bid rate of the Swiss franc is $.560 while the ask rate is $.566 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? a. $7,067 b. $8,556. c. $10,114 d. $12,238 15. 16. You just received a gift from a friend consisting of 1,000 Thai baht, which you would like to exchange for Australian dollars (AS). You observe that exchange rate quotes for the baht are currently $.023, while quotes for the Australian dollar are $.576. How many Australian dollars a. A$39.93 b. A$25,043.48. c. d. A$553.00. none of the above 17. Assume that interest rate parity holds. us, interest rate is 13% and British interest rate is 10%. The forward rate on British pounds exhibits aofpercent. a. discount; 2.73 b. premium; 2.73 c. discount; 3.65 d. premium; 3.65 18. The interest rate on yen is 7%. The interest rate in the US is 9%. The yen's torward rate should exhibit a premium of about 2%. a. True b. False 19. Assume a two-country world: Country A and Country B. Which of the following is correct about purchasing power parity (PPP) as related to these two countries? a. If Country A's inflation rate exceeds Country B's inflation rate, Country A's b. If Country A's interest rate exceeds Country B's inflation rate, Country A's c. If Country A's interest rate exceeds Country B's inflation rate, Country A's d. If Country B's inflation rate exceeds Country A's inflation rate, Country A's currency will weaken. currency will weaken, currency will strengthen. currency will weaken. 20. According to the IFE, if British interest rates exceed U.S. interest rates: a. the British pound's value will remain constant. b. the British pound will depreciate against the dollar. c. the British inflation rate will decrease. d. the forward rate of the British pound will contain a premium.Explanation / Answer
15) Buy at ask, Sell at bid. Ask is lower at Bank Y and Bid is higher at Bank X. Thus, USD 1000,000 converted to SF at USD 0.566 per SF at Bank Y, which gives you SF 1,766,784. Therefore, sell SF at Bank X at USD 0.57 per SF, leaving you with USD 1,007,067. Hence, the correct answer is "A".
16) To calcuate the cross currency exchange rate between Thai Baht and AUD, inverse the USD per Thai Baht quote, this will give you (1/0.023 = 43.478). Now, multiply this by USD per AUD ( TBHT by USD multiplied by USD by AUD, thus USD will cancel out and leave you with TBHT by AUD). The Final ER will stand at TBHT 25.0434 per AUD. Divide the sum of TBHT 1000 by 25.0434 and you will recieve AUD 39.93 or "A".
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