According to the Law of One Price

question 159

Multiple Choice

According to the law of one price,

• A)if transaction costs are zero, identical goods should sell for the same price everywhere.
• B)if transactions costs are zero, firms must sell a product at a price equal to its marginal cost.
• C)if transactions costs are zero, all firms must earn the same profit margin.
• D)there must be no differences in the cost of producing identical goods by different producers.

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Definitions:

Annual Risk-free Rate

The return on investment expected from a risk-free asset over a one-year period.

Futures Price

The agreed price for the future delivery of an asset in a futures contract market.

Spot Exchange Rate

The current exchange rate at which one currency can be traded for another immediately.

Arbitrage

The strategy of exploiting price differences of identical or similar financial instruments across different markets to gain profit with minimal risk.