QUESTION 36

Questions 36 to 40

UMB is considering in launching a new Absolute Currency Return Fund. In order to establish a currency hedging strategy, Caleb gathers the following information about foreign exchange rates, spot rate, forward rate, inflation and interest rates.

Exhibit 5
USD/GBP	1.6500
CHF/USD	1.8460
Spot rate: USD/GBP	1.8328
90-day forward rate USD/GBP	1.8432
CAD/USD spot rate	1.18
Expected U.S. inflation	4%
Expected Canadian inflation	2%
U.S. Interest rate	8%
Canadian Interest rate	5%

Factor 1: Currency appreciation/depreciation over time should just offset differences in interest rates.

The specific concept is related in factor 1 is most accurately describes the:

	A.	Purchasing power parity relation
	B.	Interest rate parity relation.
	C.	International Fisher relation.

1 points

QUESTION 37

Based on the data presented in Exhibit 5, the CHF/GBP cross exchange rate is close to

A.

3.4314

B.

2.3182

C.

3.0459

1 points

QUESTION 38

Based on the data presented in Exhibit 5 and according to relative purchasing power parity:

	A.	The Canadian dollar will depreciate by 2% and expected CAD/USD spot rate will be 1.1564.
	B.	The Canadian dollar will appreciate by 2% and expected CAD/USD spot rate will be 1.1564.
	C.	The U.S. dollar will depreciate by 2% and expected CAD/USD spot rate will be 1.2036.

1 points

QUESTION 39

Based on the data presented in Exhibit 5, the annualized forward GBP is discount or premium for the USD/GBP (Spot rate: $1.8328 and forward rate: $1.8432) quote:

	A.	2.27%, Premium and GBP is a strong currency.
	B.	2.27%, premium and the USD is a strong currency.
	C.	2.27%, discount and GBP is a weak currency.

1 points

QUESTION 40

One of UMBs high net worth U.S. clients is interested in trading British pounds. He is convinced that current market conditions make the British pounds very attractive relative to Euro and other currencies in the region. In order to create the appropriate strategy to determine whether an arbitrage opportunity exists, Caleb lists the market data on Exhibit 6.

Exhibit 6
Current $/ spot rate	1.85
1-year $/ forward rate	1.70
1-year U.S. Interest rates	8%
1-year U.K. Interest rates	10%

Based on Exhibit 6, Caleb tells his client the following strategy and arbitrage profit.

Strategy: Since the forward rate is lower than what the interest rate parity indicates, we would borrow British pounds, convert to dollars at the spot rate, and lend dollars.

Arbitrage profit: If we borrow 5000, we would profit $640 from the transactions.

With respect to above strategy and arbitrage profit is Caleb correct?

	A.	Caleb is only correct regarding strategy
	B.	Caleb is correct regarding strategy and arbitrage profit
	C.	Caleb is only correct regarding arbitrage profit