Evaluation of discount and premium

Question

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?

Answer 1

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.