Question

Question 11 (1 point)

Which of the following is not the Arbitrage Rule of Thumb?

Question 11 options:

	a) If the difference in interest rate is greater than forward premium, then invest in the higher interest currency
	b) Covered interest arbitrage opportunities continue to hold until interest rate parity is re-established
	c) If the difference in interest rate is less than forward premium, then invest in the lower interest currency
	d) If the difference in interest rate is greater than forward premium, then invest in the lower interest currency

Question 12 (1 point)

Which of the following statements is correct in relation to call option?

Question 12 options:

	a) Spot = Strike = Exercise
	b) Spot ? Strike = Lapse/Do not exercise
	c) Spot > Strike = Exercise
	d) Spot < Strike = Exercise

Answer 1

Q11. d)if the difference in interest rate is greater than forward premium then invest in the lower interest currency.

option a) and c) are the rule of thumb where as b) is true about arbitrage and option d) is the answer because it is against the rule of thumb.

Q12. C) spot>strike=exercise

Stike price or exercise price is the price at which the invest can buy or sell the option. And spot price is the market price. It will be benefit the investor if he exercise the option when spot price is greater than stike price, which means that the investor can purchase at strike price and then instantly sell it at higher spot price. The difference in them is the profit earned.