1. An FRA will be entered at the end of year two with one net payment occurring at the end of year three. Which of the following statements about FRAs is FALSE?
I. An FRA is executed OTC, not through an exchange
II. An FRA is an agreement to exchange a predetermined rate of fixed interest for a floating rate of interest for a specific period of time starting at some point in the future
III. When valuing the FRA today, assumes that the forward rates (2F3) is realized IV. When valuing an FRA today, discount the payoff at T=3 by the two year spot rate (0S2)
A. I
B. II
C. III
D. IV
E. None of the statements
You are a working for a US arbitrage firm and notice that the same stock has two different quotes on two different exchanges. Use the following information for Problems 19-21. ? On the NYSE, the stock has a bid-ask of 97.47-98.70 USD ? On the London Exchange, the stock has a bid-ask of 87.12-88.00 GBP ? The exchange rate is 1.15 USD : 1.00 GBP ? To exchange USD to GBP, you incur a 1.0% FX fee ? To exchange GBP to USD, you incur a 1.0% FX fee
2. Is there an arbitrage opportunity? If so, how much would you stand to make if you sold the stock on one exchange and instantaneously purchased the stock on the other exchange?
A. Yes, approximately 1.50 USD
B. Yes, approximately 1.25 USD
C. Yes, approximately 0.50 USD
D. Yes, approximately 0.25 USD
E. No
3. when the markets are under distress, spreads __________ and arbitrage opportunities are __________ likely. It would be more important to use __________ if you noticed an arbitrage opportunity under these market conditions.
A. Widen ; less ; limit
B. Widen ; more ; limit
C. Widen ; less ; market
D. Narrow ; more ; limit
E. Narrow ; less ; market