Respond to the required questions, double-spaced, APA format (source citations and reference insertions) essay (Each Question). In each Case Study, you must use at least three (3) references (in text), including the textbook (included below).
Textbook reference:
Berk, J. & DeMarzo, P. (2017). Corporate Finance: The Core (Fourth Edition). Boston, MA: Pearson.
(This Assignment Box maybe linked to Turnitin.)
Respond to the required questions, double-spaced, APA format (source citations and reference insertions) essay (Each Question). In each Case Study, you must use at least three (3) references (in text), including the textbook (included below). Textbook reference: Berk, J. & DeMarzo, P. (2017). Corporate Finance: The Core (Fourth Edition). Boston, MA: Pearson. (This Assignment Box maybe linked to Turnitin.) 1- 150 Words: Discussion The Law of One Price states that equivalent investment opportunities trading in different competitive markets will have the same price. Yet, one can find examples where that rule seems to be violated. It is a well-known fact that Americans pay a much higher price for most prescription drugs than people in most other countries. Also, the price (when adjusted for exchange rates) for the same make and model of automobile varies greatly across different countries. Furthermore, the price of a barrel of crude oil varies between locations. For example, on October 12, 2012, the price for Brent crude oil produced in Europe was $114.21 and the price for West Texas Intermediate (WTI) crude oil produced in Texas was $91.86. Do these three cases demonstrate that the Law of One Price is false? Why or why not? 2- 100 Words (Melissa Strickland) – Reply and Comment on the following: Despite the different prices of these products shown in different markets, these examples do not falsify the Law of One Price. According to Berk and DeMarzo (2017), “the practice of buying and selling equivalent goods in different markets to take advantage of a price difference is known as arbitrage” (p. 72). Using one of these cases as an example, an arbitrage opportunity exists for a firm to buy oil produced in Texas at $91.86 and sell the same oil in Europe for $114.21. This firm stands to make a profit of $22.35 for each unit of oil bought at the lower price and sold at the higher price. Watts (2009) states, “if a particular commodity trades at different prices in different markets, profit-seeking entrepreneurs will buy in the under-valued market and sell into the over-valued market until any price discrepancy reflects transactions costs alone” (p. 79-80). This does not follow the Law of One Price; however, supply and demand play a role in market and price equilibrium, causing the equivalent products to eventually be valued at the same price across markets. Continuing to use the example above, the increasing demand of oil in Texas will eventually cause the price to rise. Similarly, the increased supply of oil in Europe will cause prices to fall. Ultimately, these price changes bring about price equilibrium in which oil prices even across different markets. Josephs (2013) provides another example demonstrating how demand can cause price increases: “prices of robusta coffee beans are up 13% in the past year because of rising global demand, especially among price conscious consumers in emerging markets like Russia and Brazil.” Although arbitrage opportunities do exist, the increasing number of profit-seeking buyers increase in attempts to take advantage of the different market prices of equivalent goods. Once many buyers and sellers enter the market, the arbitrage opportunity disappears as the market shifts to a normal market finding a price equilibrium. As Watts (2009) states, “both neoclassical and Austrian economic theory predict that arbitrage opportunities won’t long prevail on the market” (p. 79). Ultimately, the general concepts of supply and demand allow markets to end arbitrage opportunities and follow the Law of One Price. 3- 100 Words (Ciara Quinn) – Reply and Comment on the following: The law of one price is an important concept to learn and understand in the financial world. This law is based off the idea that a product, in a normal, efficient, market should trade at the same value across said market. In other words, identical goods sold, no matter the locations, should sell that identical prices (Berk & DeMarxo, 2017). As the examples given to us in the discussion prompt and as we have witnessed in our daily lives, this is not the case. Gas is the most notable example. Earlier today I saw gas for $2.15 and right down the road at WaWa it was $1.99. This discrepancy means a few things. First of all, it shows us that our market is not the ‘perfect; market required for the law of one price needs to operate in. We live in a capitalist and competitive environment where companies can price their goods as they see fit. There might be a standard or accepted price for those goods, but that does not mean the seller has to price their goods at that value- especially if customers are willing to pay more. Yes, this means that the law of one price is false in our market, but it does not mean that this law cannot exist in another market or simply that the law is wrong. Many factors play into how the market is doing and what value is assigned to products and investments. These factors make the law of one price difficult to play out in the real market. On paper the law makes sense, because it is simply what should happen, but demand, policies, lifestyle, and unexpected events get in the way. Understanding how a perfect market operate and what all a perfect market entails, helps us conceptualize our current market and the affects we have on it and it has on us.