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 exchange price of the yen.
B. increase in the forward exchange price of the dollar.
C. sale of dollars in the forward market.
D. purchase of yen in the spot market.
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Consider the interaction between U.S. dollars and U.K. pounds. When the forward premium on the dollar is zero, it means:
A. the current spot price of dollars equals the future spot price of dollars.
B. the future spot price of dollars will be equal to the current forward price of dollars.
C. the current forward price of dollars equals the current spot price of dollars.
D. the spot exchange rate value of the pound is moving toward $1 per pound.
Suppose the interest rate on one-year U.S. T-bills is 4% and interest rate on one-year British T-bills is 6.5%. If the dollar is at a one-year forward premium against the British pound of 3%, the covered interest differential is:
A. the same as the uncovered interest differential.
B. equally favoring investments in both the nations.
C. in favor of investments in the United Kingdom.
D. in favor of investments in the United States.
If the covered interest differential is zero, then:
A. covered international investments will be profitable once we add in the interest earned on the foreign bonds.
B. covered interest rate parity has not yet been reached.
C. the overall covered return on a foreign-currency investment equals the return on a comparable domestic-currency investment.
D. a currency is at a forward premium by as much as its interest rate is higher than the interest rate in the other country.
When the current $/€ forward rate is below the current spot rate, the dollar is at a(n) _____.
A. forward premium
B. forward discount
C. covered parity
D. uncovered parity
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