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Question 1. The price of a commodity in New Zealand is NZD 10, whereas the price of the same commodity in Australia is AUD 6.40.

Question 1. The price of a commodity in New Zealand is NZD 10, whereas the price of the same commodity in Australia is AUD 6.40. The current exchange rate of the AUD in terms of NZD is 1.2535 Is the law of one price (LOP) satisfied or violated? Explain and show your work a) b) In part a), if the LOP is violated, explain what will happen? What is the direction of arbitrage and what is the per unit arbitrage profit? c) What is the exchange rate compatible with the LOP? Show your work d) Based on your answer in part c), is the Australian dollar (AUD) overvalued or undervalued and by how much? Explain

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