Question

According to IRPT, only the most skilled arbitrageurs are able to earn pure profits from their covered interest arbitrage activities. TRUE OR FALSE?

Aluminum sells in the U.S. for $225/unit, and sells in Canada for CD150/unit. If the spot rate is $1.75/CD, arbitrageurs would buy aluminum in Canada and sell it in the U.S. TRUE OR FALSE?

PPP holds equally for services and for commodities. TRUE OR FALSE?

The current spot rate is $0.95 = 1.0, and interest rates on 1-yr risk-free securities in Europe and the U.S. are 9% and 4% respectively. Your employer asks you to negotiate a 1-yr forward contract that will enable him to exchange dollars for 1,000,000. If a bank quotes a forward rate of $0.93, on a 1-year contract, you should accept it. TRUE OR FALSE?

Answer 1

1. According to IRPT, only the most skilled arbitrageurs are able to earn pure profits from their covered interest arbitrage activities. TRUE OR FALSE?

Ans: True

Arbitrage is a skill, wrong strategy may lead to incuring losses.

2. Aluminum sells in the U.S. for $225/unit, and sells in Canada for CD150/unit. If the spot rate is $1.75/CD, arbitrageurs would buy aluminum in Canada and sell it in the U.S. TRUE OR FALSE?

PPP holds equally for services and for commodities. TRUE OR FALSE?

Ans: False

since the currency exchange rate is $1.75/CD, if we buy Aluminum from canada at 150 and will be able to sell at 225 (150*1.75), which will not fectch any profit i.e (225-225*0), hence the arbitrage doesnot exist.

3. The current spot rate is $0.95 = 1.0, and interest rates on 1-yr risk-free securities in Europe and the U.S. are 9% and 4% respectively. Your employer asks you to negotiate a 1-yr forward contract that will enable him to exchange dollars for 1,000,000. If a bank quotes a forward rate of $0.93, on a 1-year contract, you should accept it.

Ans: False

If we invest in bank, we will earn 90000 as return (9% of 1000000), but the benefit o future contract is only 20000 (0.95-0.93 = 0.02, 0.02*1000000 = 20000)