Question 1 The bid-ask quote at Bank X for the New Zealand dollar is .33 – .335 USD/NZD. At Bank Y, the bid-ask quote is .32 – .325 USD/NZD. Given this information, what would be your gain if you use 1,000,000 USD and execute one cycle of locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with? Answer 10 points Question 2 Assume the following information: 1-year interest rate on U.S. dollars = 12% 1-year interest rate on Singapore dollars = 10% 1-year forward rate of Singapore dollars = 0.412 USD/SGD Spot rate of Singapore dollar = 0.400 USD/SGD Given this information, how much profit can be made with covered interest arbitrage, by borrowing 1 million USD? Answer 10 points Question 3 In the previous question, what would be the 1 year forward rate on the SGD if the interest rate parity was in effect? (Enter answer accurate to 4 decimal places.) Answer 10 points Question 4 Assume the following information for a bank quoting on spot exchange rates: Exchange rate of Singapore dollar in USD = 0.32 USD/SGD Exchange rate of pound in USD = 1.50 USD/GBP Exchange rate of pound in Singapore dollars = 4.50 SGD/GBP Based on the information given, as you and others perform triangular arbitrage, what should logically happen to the spot exchange rates? Answer USD/SGD goes up USD/SGD goes down USD/GBP goes up USD/GBP goes down SGD/GBP goes up SGD/GBP goes down 10 points Question 5 In the previous problem, if you were to conduct one cycle of triangular arbitrage using 1000 USD to start with, what would be your net profit? Answer 10 points Question 6 Assume that interest rate parity holds, and the euro’s interest rate is 9% while the U.S. interest rate is 12%. What is the forward premium on the EUR? (Enter answer in percents, accurate to 2 decimal places.) Answer 10 points Question 7 Assume IRP holds, and the US interest rate is 3%, and Japan rate is 2%. If a person…
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