Indicate whether the following statement is TRUE or FALSE. (10 marks)

Required: The volatility of an international equity investment is mostly determined by the volatility of the local equity market. Although exchange rate changes are quite variable, they are nearly uncorrelated with local stock returns.

International diversification results in portfolios with risk levels lower than what can be achieved with domestic diversification alone.

The correlation between returns on companies in the same industry and domiciled in the same country is usually greater than the correlation between returns on companies in the same industry but in different countries.

The American terms state the dollar price of one unit of foreign currency, such as $0.0085/.

In forward contracts, an exchange clearinghouse takes one side of every transaction.

A currency is said to be overvalued on foreign exchange market if its external purchasing power is greater than its internal purchasing power.

If relative purchasing power parity (PPP) holds, it means that the real exchange rate is constant, but the nominal exchange rate change is equal to the inflation rate differential between two countries.

When the dollars are traded at a forward discount against the yen, the yen must be the low-interest-rate currency relative to the dollar.

The bid-ask spread in the forward market should be larger than the bid-ask spread in the spot market, if the currency is traded at a forward discount.

A share trading system may be order driven or price driven. In a order-driven system, share prices are determined in a continuous auction that brings together the supply and demand of shares.