Explain how the premium and discount are determined while assets are PTM (priced-to-market). When would the law of one price prevail in international capital markets although if foreign equity ownership restrictions are enforced?
Answer: The premium and discount are defined by
(a) The severity of restrictions imposed on foreigners and
(b) Foreigners’ capability to mitigate the effect of these restrictions by using their own domestic securities. In a unique case where foreigners can exactly replicate the securities under restriction, then PTM (pricing-to-market) will cease to apply.