For the Law of One Price to Hold,all of the Following

question 48

Multiple Choice

For the law of one price to hold,all of the following are necessary EXCEPT:

• A) transportation costs must be negligible.
• B) exchange rates must be fixed.
• C) tariffs must not be levied by any country.
• D) all goods and services must be tradable.
• E) traded goods must be homogeneous.

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Definitions:

Forward Rate

An agreed-upon price for a financial transaction that will occur at a future date.

International Fisher Effect

A theory stating that the difference in nominal interest rates between two countries is equal to the expected change in their exchange rates.

Inflation Rate

The pace at which prices for general goods and services escalate, causing a decline in the ability to purchase.

Treasury Bill

Short-term government securities with maturity periods of one year or less, sold at a discount from face value.