The Argentine peso (ARS) is officially trading at ARS 4. 65 = US$1, with increasing volume of forex transactions channeled through the black market at ARS 6 = US$1. Interest rates on bank loans under tight supervision from the central bank are controlled with a benchmark prime rate of 12. 50 percent when inflation is generally estimated at 21 percent annually. With recent nationalization of foreign-owned oil and utility companies, stock trading on the Buenos Aires Bolsa has declined sharply whereas the Merval index volatility has jumped to 37 percent compared to 16 percent on the New York Stock Exchange.

a. Explain why Argentina’s capital market is severely segmented from the global capital market (proxied by the New York Stock Exchange).

b. Map in a 3-D space Argentina’s capital market.

c. Assume that Argentina’s central bank decides to let the ARS float unencumbered by exchange controls and that the exchange rate promptly falls to ARS 5. 65 = US$1. How would Argentina’s position in the 3-D segmentation space adjust?