21. The proportionate difference between the current forward exchange rate value of a currency and its current spot value is the __________ premium. a. Investment b. Spot c. Forward d. Currency-option 22. The __________ differential is approximately equal to the forward premium on a currency plus the interest rate differential. a. Covered interest b. Uncovered interest c. Covered currency d. Uncovered currency 23. __________ arbitrage is buying a country’s currency spot and selling that country’s currency forward to make a net profit from the combination of the difference in interest rates between countries and the forward premium on the country’s currency. a. Covered interest b. Uncovered interest c. Covered currency d. Uncovered currency 24. Suppose the interest rate on 6-month treasury bills is 7 percent per year in theUnited Kingdom and 4 percent per year in the United States. If today’s spot price of the pound is $2.00 while the 6-month forward price of the pound is $1.98 by investing in U.K. treasury bills rather than U.S. treasury bills and covering exchange rate risk U.S. investors earn an extra return for the 6 months of: a. 0.5 percent. b. 1.5 percent. c. 3 percent. d. It is not possible to determine without additional information. 25. Suppose the interest rate on 6-month treasury bills is 7 percent per year in theUnited Kingdom and 4 percent per year in the United States. If today’s spot price of the pound is $2.00 while the 6-month forward price of the pound is $1.98 by investing in U.K. treasury bills rather than U.S. treasury bills and NOT covering exchange rate risk U.S. investors earn an extra return for the 6 months of: a. 0.5 percent b. 1.5 percent c. 3.0 percent d. It is not possible to determine without additional information 26. Suppose the interest rate on 6-month treasury bills is 7 percent per year in theUnited Kingdom and 4 percent per year in the United States and today’s spot price of the pound is $2.00 while the 6-month forward price of the pound is $1.98. If the price of the 6-month forward pound were to ____________ U.S.investors would no longer earn an extra return by shifting funds to the United Kingdom. a. Rise to $1.99 b. Rise to $2.01 c. Fall to $1.96 d. Fall to $1.97 27. If the expected uncovered interest differential is __________ then the expected overall return favors uncovered investing in the foreign-denominated currency. a. Positive b. Negative c. Zero d. Unchanged 28. _________ parity is the condition where the expected uncovered differential equals zero. a. Covered interest b. Uncovered interest c. Covered currency d. Uncovered currency 29. Consider covered investments between the United States and Japan. If Japanese interest rates decrease interest arbitrage operations will most likely result in a(n): a. Increase in the spot price of the yen. b. Increase in the forward price of the dollar. c. Sale of dollars in the forward market. d. Purchase of yen in the spot market. 30. If the forward premium of the euro is positive the exchange market’s consensus appears to be that over the period of a forward contract the spot rate of the euro will: a. Depreciate. b. Appreciate. c. Remain constant. d. Fluctuate randomly.
