Question
The price of a commodity in New Zealand is NZD 15, whereas the price of the same commodity in Australia is AUD 9.40. The current
The price of a commodity in New Zealand is NZD 15, whereas the price of the same commodity in Australia is AUD 9.40. The current exchange rate of the AUD in terms of NZD is 1.3805
- Is the law of one price (LOP) satisfied or violated? Explain and show your work
- 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?
- What is the exchange rate compatible with the LOP? Show your work
Based on your answer in part c), is the Australian dollar (AUD) overvalued or undervalued and by how much? Explain.
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Financial Markets And Institutions
Authors: Frederic S. Mishkin
2nd Edition
0321014650, 9780321014658
