Consider the following information about prices, P = $150; EP* = $180. If the cost of transporting the product is $30, then the LOOP suggests that:
A) there is no room for arbitrage.
B) the arbitrage band is between 0.91 and 1.1
C) there is significant profits to be made from arbitrage.
D) the arbitrage band is between 0.2 and 1.8.

Question

Quizplus · Accepted Answer

The Law of One Price (LOOP) suggests that in the absence of transportation costs and barriers to trade, the price of an identical product should be the same in different markets. Given that the price in one market is $150 (P) and in another market is $180 (EP*), and the cost of transporting the product is $30, the difference in prices exactly matches the transportation cost. This means there is no profit to be made from buying in one market and selling in the other, indicating there is no room for arbitrage.

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