Use the Following Information to Answer the Question(s) Below

question 7

Multiple Choice

Use the following information to answer the question(s) below.
Rearden Metal, a U.S. manufacturer, has made a purchase of from d'Anconia Copper and is expecting a cash outflow of 2 million ARS (Argentine Pesos) in six months. The currency spot rate is $0.2500/ARS and the six-month forward rate is F_6months = $0.2470/ARS. The appropriate annual discount rate for the Argentine Peso is 6.5% and the annual discount rate for the U.S. dollar is 4%.
-What conclusions can you make about the degree of international integration between the U.S.and Argentine markets?

• A) The markets are integrated since the PV of investing dollars today and converting them with a forward contract is less than converting into Pesos today and investing those Pesos for six months.
• B) The markets are integrated since the PV of investing dollars today and converting them with a forward contract is greater than converting into Pesos today and investing those Pesos for six months.
• C) The markets are integrated since the PV of investing dollars today and converting them with a forward contract is approximately equal to converting into Pesos today and investing those Pesos for six months.
• D) The markets are not integrated since the PV of investing dollars today and converting them with a forward contract is greater than converting into Pesos today and investing those Pesos for six months.

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Definitions:

Long-Run Equilibrium

A state where all factors of production are variable, allowing firms to make adjustments, resulting in the economy or industry operating at its full capacity.

Noncorporate Sector

The part of an economy that involves the production of goods and services by individuals and organizations which are not incorporated as companies.

Corporate Sector

The part of an economy that is run by private individuals and companies, rather than the government, typically functioning within a framework of capitalist or market-driven principles.

Payroll Tax

Levies applied to employers or employees, most often calculated as a portion of the wages that employers disburse to their personnel.