QUESTION 9 Which of the following statements regarding inter

QUESTION 9 Which of the following statements regarding interest rate panity (RP) is correct? IRP suggests that the forward rate should equal the spot rato in equilorium O The interest rate parity theory cannot be tested. O IRP cannot be adjusted for markot imparfections ike ranesactions costs O None of the above. QUESTION 10 Triangular arbitrage is only possible if the actual cross exchange rate is diferent than the impled cross ?True ? False

Solution

9.IRP theory says that forward exchange rate will be equal to spot rate multiplied by the interest rate in home currency divided by the interest rate in foreign country, making investments equally desirable in both the countries

True statement is:

IRP theory cannot be tested for market imperfections like transaction costs

10.True

If the rates are same, no arbitrage will be possible

12.Convert $1110 in Euro , get Euro 925

Buy a piano and Sell at $1200

Income per piano = 1200-1110 = $90

8. 2,000,000

$ Available = 11,000,000

Convert into Mex$ = 11,000,000/0.1 = Mex$110,000,000

Convert into Euro 110,000,000*0.13 = Euros 14300,000

Convert back to $ 14300,000/1.1 =$13,000,000

Arbitrage Profit = $2,000,000

No interest since all of this is taking place today