Evaluation of discount and premium
Describe how discount and premium are evaluated whenever the assets are priced-to-market. When would law of one price prevail within the international capital markets in case foreign equity ownership restrictions are imposed?
Expert
Premium and discount are determined by:
a) Severity of the restrictions imposed on the foreigners and
b) Ability of foreigners to alleviate the effect of these restrictions by using their own domestic securities. In special case where the foreigners may exactly imitate the securities under the restriction, then the PTM will cease to apply.
Presently, spot exchange rate is $1.50/£ and three-month forward exchange rate is $1.52/£. Three-month interest rate is 8.0% per annum within the U.S. and 5.8% per annum within the U.K. Suppose that you can borrow as much as $1,500,000 or £1,000,000.
what are the disadvantages of having adequate working capital?
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