1. The $/CD spot bid-ask rates are $0.7560–$0.7625. The 3-month forward points are 12–16. Determine the $/CD 3-month forward bid-ask rates.

A) $0.7572–$0.7641

B) $0.7548–$0.7609

C) $0.7512–$0.7616

D) Cannot be determined with the information given.

2. If one has agreed to buy a foreign exchange forward,

A) you have a short position in the forward contract.

B) you have a long position in the spot market.

C) you have a long position in the forward contract.

D) until the exchange rate moves, you haven't made money, so you're neither short nor long.

3. Consider a trader who takes a long position in a six-month forward contract on the euro. The forward rate is $1.75 = €1.00; the contract size is €62,500. At the maturity of the contract the spot exchange rate is $1.65 = €1.00.

A) The trader has lost $66,287.88.

B) The trader has made $6,250.

C) The trader has lost $625.   

D) The trader has lost $6,250.

4. When a currency trades at a premium in the forward market

A) the forward rate is less than the spot rate.

B) the forward rate is more than the spot rate.

C) the exchange rate is less than one dollar.

D) the exchange rate is more than one dollar (e.g., €1.00 = $1.28).

5. The SF/$ spot exchange rate is SF1.25/$ and the 180 day forward exchange rate is SF1.30/$. The forward premium (discount) is

A) the dollar trading at a 4% premium to the Swiss franc for delivery in 180 days.

B) the dollar trading at a 4% discount to the Swiss franc for delivery in 180 days.

C) the dollar trading at an 8% discount to the Swiss franc for delivery in 180 days.

D) the dollar trading at an 8% premium to the Swiss franc for delivery in 180 days.

6. Suppose you observe a spot exchange rate of $1.0500/€. If interest rates are 5% APR in the U.S. and 3% APR in the euro zone, what is the no-arbitrage 1-year forward rate?

A) €1.0300/$      

B) $1.0300/€      

C) $1.0704/€      

D) €1.0704/$

7. Suppose that the one-year interest rate is 3.0 percent in Italy, the spot exchange rate is $1.20/€, and the one-year forward exchange rate is $1.18/€. What must the one-year interest rate be in the United States?

A) 1.0128%

B) 1.2833%

C) 4.75%     

D) none of the options

8. Covered Interest Arbitrage (CIA) activities will result in

A) unstable international financial markets.

B) a disintermediation.

C) no effect on the market.     

D) restoring equilibrium prices quickly.

9. Suppose that the annual interest rate is 5.0 percent in the United States and 3.5 percent in Germany, and that the spot exchange rate is $1.12/€ and the forward exchange rate, with one-year maturity, is $1.16/€. Assume that an arbitrager can borrow up to $1,000,000. If an astute trader finds an arbitrage, what is the net cash flow in one year?

A) $21,964.29    

B) $46,207  

C) $10,690  

D) $15,000

10. The interest rate at which the arbitrager borrows tends to be higher than the rate at which he lends, reflecting the

A) midpoint.

B) transaction cost paradigm.

C) bid-ask spread.     

D) none of the options