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)none of the above

Question

Quizplus · Accepted Answer

In an efficient market without barriers to capital flows, the default risk premiums on different types of debt instruments should reflect their inherent risks. If there were cost-savings in using QSD, it would suggest that some default risk premiums were mispriced, creating an opportunity for arbitrageurs to exploit. Therefore, the argument of cost-savings from QSD is difficult to accept in an efficient market without barriers to capital flows. Option B is incorrect because it mentions exchange rates on different maturities of forward contracts, which is not relevant to the QSD's cost-savings argument.

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