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Solutions_ch6

# Solutions_ch6 - Problem 6.1 The Big Mac Hamburger Standard...

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Problem 6.1 The Big Mac Hamburger Standard ANALYSIS (1) (2) (3) (4) (5) Big Mac Actual Big Mac Implied Local currency Price in local exchange rate Prices in PPP of the under (-) / over (+) Country currency (problem 6.1) dollars dollar valuation United States (dollar) 2.80 2.80 1.00 Argentina (peso) 7.50 3.60 2.08 2.68 -25.6% Canada (dollar) 3.50 1.63 2.15 1.25 -23.3% Euro Area (euro) 2.90 \$1.02 \$2.96 \$0.97 5.64% Japan (yen) 300 122 2.46 107.14 -12.2% Note: The euro is quoted in US\$/euro. Calculation notes: Column 3 = Column 1 / Column 2; except for the euro, which is Column 1 x Column 2. Column 4 = Column 1 / \$2.80; except for the euro, which is \$2.80 / Column 1. Column 5 = Column 4 / Column 2

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Problem 6.2 Exchange Rate Pass-Through Steps Value Initial spot exchange rate (yen/\$) 122.00 Initial price of a Nissan Maxima, in yen 3,000,000 Expected US dollar inflation rate for the coming year 2.000% Expected Japanese yen inflation rate for the coming year 0.000% Desired rate of pass through by Nissan 70.000% a. What was the export price for the Maxima at the beginning of the year? Year-beginning price of a Maxima (in yen) 3,000,000 Spot exchange rate, Yen/US\$ 122.00 Year-beginning price of a Maxima (in US\$) \$24,590.16 b. What is the expected spot rate at the end of the year assuming PPP? Initial spot rate (yen/\$) 122.00 Expected US\$ inflation 2.00% Expected Japanese yen inflation 0.00% Expected spot rate at end of year assuming PPP (yen/\$) 119.61 c. Assuming complete pass through, what will the price be in US\$ in one year? Price of Maximia at beginning of year, in yen 3,000,000 Japanese yen inflation over the year 0.000% Price of Maxima at end of year, in yen 3,000,000 Expected spot rate one year from now assuming PPP (yen/\$) 119.61 Price of Maxima at end of year in US\$ \$25,081.97 d. Assuming partial pass through, what will the price be in US\$ in one year? Price of Maximia at end of year, in yen 3,000,000 Amount of expected exchange rate change, in percent (from PPP) 2.000% Proportion of exchange rate change passed through by Maxima 70.000% Proportional percentage change 1.400% Effective exchange rate used by Maximia to price in US\$ for end of year 120.316 Price of Maximia at end of year, in US\$ \$24,934
Problem 6.3 Argentine pesos Assumptions Value Spot exchange rate, fixed peg, early January 2002 (pesos/\$) 1.0000 Spot exchange rate, January 29, 2003 (pesos/\$) 3.2000 US inflation for year (per annum) 2.20% Argentine inflation for year (per annum) 20.00% a. What should be the exchange rate in October according to PPP? Beginning spot rate (pesos/US\$) 1.00 Argentine inflation 20.00% US inflation 2.20% PPP exchange rate 1.17 b. By what percentage was the peso overvalued? Actual exchange rate (pesos/US\$)

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Solutions_ch6 - Problem 6.1 The Big Mac Hamburger Standard...

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