In an efficient market without barriers to capital flows,the cost-savings argument of the QSD is difficult to accept,because
A)it implies that an arbitrage opportunity exists because of some mispricing of the default risk premiums on different types of debt instruments.
B)it implies that an arbitrage opportunity exists because of some mispricing of the exchange rates on different maturities of forward contracts.
C)it implies that an arbitrage opportunity exists because of some mispricing of the default risk premiums on different types of debt instruments,and it implies that an arbitrage opportunity exists because of some mispricing of the exchange rates on different maturities of forward contracts.
D)none of the options

Question

Quizplus · Accepted Answer

In an efficient market without barriers to capital flows, the prices of debt instruments and exchange rates would be accurately reflecting their respective risks and market conditions. Therefore, the cost-savings argument of the QSD, which suggests that it is possible to profit from differences in premium payments for different types of debt instruments or maturities of forward contracts, would not hold true. Any perceived arbitrage opportunity would be quickly exploited by other market participants, resulting in the elimination of the price discrepancy. Option B is irrelevant as it does not relate to the QSD, while Option C repeats Option A.

In an Efficient Market Without Barriers to Capital Flows,the Cost-Savings