Consider the following information about prices, P = $150; EP*= $180. If the cost of transporting the product is $15, the no-arbitrage band is within the limits of:
A) 0.91-1.2.
B) 0.99-1.01.
C) 0.91-1.1.
D) 1-1.5.

Question

Quizplus · Accepted Answer

The no-arbitrage band is calculated by taking into account the domestic price (P), the foreign price (EP*), and the transportation cost. The lower limit is found by dividing the domestic price by the foreign price plus transportation cost, and the upper limit is found by dividing the domestic price plus transportation cost by the foreign price. Thus, Lower limit = P / (EP* + Transport Cost) = 150 / (180 + 15) = 0.909, approximately 0.91. Upper limit = (P + Transport Cost) / EP* = (150 + 15) / 180 = 0.917, approximately 1.1. Therefore, the no-arbitrage band is within the limits of 0.91-1.1.

Consider the Following Information About Prices, P = $150; EP*=