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Free CFA-Level-I Exam Braindumps (page: 312)

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Given the following data, what will an arbitrageur earn after one year on a covered interest arbitrage if he begins with $1 million?

In New York today Interest rate = 7%
In London today spot rate = $1.75/L
Interest rate = 12%
In London one year forward rate = $1.68/L

  1. $7,560
  2. $5,200
  3. $4,300
  4. $3,580
  5. $6,800

Answer(s): B

Explanation:

Begin by borrowing $1,000,000 at 7%, owing $1,070,000 at year end.
Convert the $1,000,000 to pounds at $1.75/L = L571,428.57 and invest this in London at 12% yielding L640,000 at year end. At the same time, sell the L640,000 forward at a rate of $1.68/L for delivery in one year yielding $1,075,200 at year end. At the end of the year, collect the L640,000 and deliver to the bank's foreign exchange dept. in return for $1,075,200. Repay the $1,070,000 from the $1,075,200 leaving a profit of $5,200.



Which of the following is correct?

  1. Without tariff protection the number of jobs available to domestic workers would decline.
  2. Less than 5 percent of world output is sold in a country different from the one in which it is produced.
  3. Exports represent about 30 percent of U.S. GDP.
  4. Regarding international trade, if one country gains, another country must lose.
  5. The volume of international trade has grown rapidly in recent decades.

Answer(s): E

Explanation:

The volume of international trade, enhanced by improved transportation and communication has grown rapidly in recent years. Approximately 21 percent of the world's total output is now sold in a country other than that in which it was produced. This is double the figure of three decades ago.



If the one month FF/$ exchange rate is 8.0200-50 this implies:

  1. the bank is willing to commit itself today to sell dollars in one month for 8.0200 francs or to buy them for 8.0250 francs.
  2. the bank is willing to commit itself today to buy dollars in one month for 8.0200 francs or to sell them for 8.0250 francs.
  3. the bank is willing to commit itself today to buy dollars for 8.0200 francs or to sell them for 8.0250 francs.
  4. the bank is willing to commit itself today to buy dollars in one month for 8.0200 francs or to sell them for 8.0150 francs.
  5. none of these answers

Answer(s): B

Explanation:

In a forward, or futures, contract, a commitment is irrevocably made on the transaction date, but delivery takes place later, here a month later. The bid-ask quotation here implies that the bank is willing to commit itself today to buy dollars in one month for 8.0200 francs or to sell them for 8.0250 francs.



If the French franc moves from 8.00 to 7.10 francs to the dollar:

  1. the dollar now trades for 0.141 francs.
  2. the French franc has depreciated.
  3. the franc now trades for 7.10 dollars.
  4. the French franc has appreciated.
  5. the U.S. dollar has appreciated.

Answer(s): D

Explanation:

Since the U.S. dollar now purchases less French francs the U.S. dollar has depreciated; symmetrically, the French franc has appreciated. Each franc now buys .141 dollars whereas before each franc purchased .125 dollars.






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