If the Exchange Rate Is 8 Moroccan Dirhams Per U

question 396

Multiple Choice

If the exchange rate is 8 Moroccan dirhams per U.S. dollars, a crate of oranges costs 400 dirhams in the Moroccan capital of Rabat, and a similar crate of oranges in Miami sells for $45 dollars, then

• A)the real exchange rate is greater than one and arbitrageurs could profit by buying oranges in the United States and selling them in Morocco.
• B)the real exchange rate is greater than one and arbitrageurs could profit by buying oranges in Morocco and selling them in the United States.
• C)the real exchange rate is less than one and arbitrageurs could profit by buying oranges in the United States and selling them in Morocco.
• D)the real exchange rate is less than one and arbitrageurs could profit by buying oranges in Morocco and selling them in the United States.

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Definitions:

New Venture

A newly established business enterprise, particularly one that is entrepreneurial in nature, aiming to meet a marketplace need by developing a viable business model around a product, service, process, or platform.

Certainty Equivalent Approach

A method to evaluate risk where uncertain future cash flows are converted into certain cash flows under the assumption of risk neutrality.

Risk-Free Rate

The interest rate excluding all risk premiums. The risk-free rate consists of the pure rate and an inflation adjustment. It is approximated by the three-month treasury bill rate. Written as kRF.

Real Option

The value of additional decision-making opportunities available to an investor or company once an initial investment has been made.