Question

TRUE OR FALSE

1. If a currency’s spot market is illiquid, its exchange rate may be highly sensitive to a single large purchase or sale transaction. ___________

2. In triangular arbitrage, where three types of currencies if any two of the three exchange rates are known, the exchange rate of the third pair can be determined. __________

3. Covered interest arbitrage is the process of capitalizing on the interest rate differential between two stock exchanges in the same country. __________

4. Locational arbitrage explains why exchange rate quotations among banks at different locations normally will not differ by a significant amount. _________

5. The equilibrium exchange rate represents that a currency should exhibit the price at which the demand for that currency is equal to supply. __________

6. Acquiring other firms in foreign countries as a means of penetrating foreign markets does not require Direct Foreign Investments. ___________

Answer 1

1. True

If a currency’s spot market is illiquid, its exchange rate may be highly sensitive to a single large purchase or sale transaction.

2. True

In triangular arbitrage, where three types of currencies if any two of the three exchange rates are known, the exchange rate of the third pair can be determined.

3. False

Covered interest arbitrage is an arbitrage trading strategy whereby an investor capitalizes on the interest rate differential between two countries.

4. True

Locational arbitrage explains why exchange rate quotations among banks at different locations normally will not differ by a significant amount.

5. True

The equilibrium exchange rate represents that a currency should exhibit the price at which the demand for that currency is equal to supply.

6. False

Acquiring other firms in foreign countries as a means of penetrating foreign markets requires Direct Foreign Investments.

A foreign direct investment (FDI) is an investment made by a firm or individual in one country into business interests located in another country. Usually, FDI takes place when an investor establishes foreign business operations or acquires foreign business assets in a foreign company.