The Law of One Price asserts that we will obtain the same valuation of a project whether
(a) we use the domestic cost of capital of the domestic currency equivalent cash flows at the forward exchange rates or
(b) we use the corresponding foreign cost of capital and then convert the present value (PV) of the foreign currency value of the cash flows at the spot rate.

Question

Quizplus · Accepted Answer

The Law of One Price states that in an efficient market, the price of identical assets or securities must be the same regardless of the currency used to price them. Therefore, using domestic or foreign cost of capital and converting cash flows at forward or spot exchange rates should yield the same valuation for a project. Thus, option A is correct.

The Law of One Price Asserts That We Will Obtain