Multiple choice questions (only one answer is correct).

1) Assume the current U.S. dollar-British spot

rate is 0.6993 per one US$. If the current nominal one-year interest rate in the U.S. is 5% and the comparable rate in Britain is 6%, what is the approximate forward exchange rate for 360 days?

A) 1.42 per one US$

B) 1.43 per one $

C) 0.6993 per one $

D) 0.7060 per one $

2)With covered interest arbitrage:

A) the market must be out of equilibrium.

B) a "riskless" arbitrage opportunity exists.

C) the arbitrageur trades in both the spot and future currency exchange markets. D) all of the above

3)Which of the following is NOT an assumption of market efficiency?

A) Instruments denominated in other currencies are perfect substitutes for one another.

B) Transaction costs are low or nonexistent.

C) All relevant information is quickly reflected in both spot and forward exchange markets. D) All of the above are true.

4)Which of the following is necessary for the calculation of the forward rate? A) the spot rate

B) the foreign currency deposit rate

C) the home currency deposit rate

D) All of the above

5)When the spot and forward exchange markets are not in equilibrium as described by interest rate parity, the potential for riskless arbitrage profit exists. This is called

A) covered interest arbitrage (CIA)

B) the purchasing power parity

C) the Fisher Effect

D) the efficiency hypothesis