QUESTION 5

Covered Interest Arbitrage brings the market into equilibrium and therefore enables the IRP to hold in the long run.

True

False

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QUESTION 6

You may invest your money either in USA at 5% or in Norway at 2%. If the forward premium is 4%, then which of the following is correct?

You must invest your money in USA

You must invest your money in Norway

Investments in USA and Norway will have the same return

None

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QUESTION 7

IRP condition shows us that, as long as the interest rates in two countries are different from each other, forward exchange rate will always deviate from the spot exchange rate.

True

False

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QUESTION 8

In Uncovered Interest Arbitrage, you borrow from the country that has high interest rates and lend at the market where interest rates are low.

True

False

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QUESTION 9

Unlike in Covered Interest Arbitrage, in Uncovered Interest Arbitrage, there is a foreign exchange rate risk which is not hedged through forward contract.

True

False