Question

Which of the following statement is correct?

a. The relative purchasing power parity theory posits that exchange rates are determined by the differences in the prices of a given market basket of traded goods and services when there are transportation costs, tariffs, quotas, and other trade barriers.

b. The American depository receipts (ADRs) are never traded on the New York Stock Exchange and the Nasdaq over-the-counter market and cannot be created by buying foreign stock and placing in special trusts.

c. In general, the diversification benefits are smaller for a portfolio that contains both domestic and foreign securities, rather than domestic securities alone.

d. All the answers are incorrect.

e. If a company holds stocks or bonds denominated in the U.S. dollars in other countries, the fluctuations in the value of the U.S. dollar will affect the dollar value of the stocks and bonds.

Answer 1

The relative purchasing power parity theory posits that exchange rates are determined by the differences in the prices of a given market basket of traded goods and services when there are no transportation costs, tariffs, quotas, and other trade barriers. In general, the diversification benefits are higher for a portfolio that contains both domestic and foreign securities, rather than domestic securities alone.

The American depository receipts (ADRs) are never traded on the New York Stock Exchange and the Nasdaq over-the-counter market and cannot be created by buying foreign stock and placing in special trusts.

Statement (B) is correct answer.