If the Exchange Rate Between the U

question 254

Multiple Choice

If the exchange rate between the U.S.dollar and the Mexican peso (pesos per dollar) is less than the relative purchasing power between the two countries,which of the following would be true?

• A)There are opportunities for profit by purchasing goods in the United States and then selling them in Mexico.
• B)Purchasing power parity predicts that the value of the dollar will fall as traders take advantage of arbitrage opportunities.
• C)Purchasing power parity predicts that the dollar is overvalued as traders take advantage of arbitrage opportunities.
• D)There are no arbitrage opportunities for which traders can take advantage.

---

Definitions:

Contractual Obligation

A contractual obligation is a duty or responsibility that one party is legally bound to perform under a contract agreement with another party.

Cash Consideration

Payment made in cash during a transaction, as opposed to stock exchange or other non-cash assets.

Amortised Cost

A financial valuation technique that gradually writes off the initial cost of an asset over a period, or the method of allocating the cost of an intangible asset over its useful life.

Effective Interest Rate

The rate that discounts the estimated future cash payments or receipts through the expected life of the financial liability or asset or, when appropriate, a shorter period to the net carrying amount of the financial asset.