Question

Which of the following statements is FALSE?

Select one:

a.A segmented financial market has an important implication for international corporate finance: One country or currency has a higher rate of return than another country or currency, when the two rates are compared in the same currency.

b.If the return difference in a segmented financial market results from a market friction such as capital controls, corporations can exploit this friction by setting up projects in the low-return country/currency and raising capital in the high-return country/currency.

c.Important macroeconomic reasons for segmented capital markets include capital controls and foreign exchange controls that create barriers to international capital flows and thus segment national markets.

d.Political, legal, social, and cultural characteristics that differ across countries may require compensation in the form of a country risk premium.

e.The rate of interest paid on government bonds or other securities in a country with a tradition of weak enforcement of property rights is likely not really a risk-free rate. Instead, interest rates in the country will reflect a risk premium for the possibility of default, so relations such as covered interest rate parity will likely not hold exactly.

Answer 1

If, the return difference in a segmented financial market results from a market friction such as capital control, coperation can exploit this friction by setting up projects in the high return country and currency and raising the capital in low return country and currency.

It is always helpful for corporation who is operating into a multiple markets by setting up projects in a high return country and raising up capital through a low return country because the cost of capital would be lower in these countries.

Other statements except option ( B) are completely true.

Correct answer is option (B).