536-2.1a_HW[1]

536-2.1a_HW[1] - 536-2.1a_HW, 11S FIN 536 SU Page 1 of 9...

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Unformatted text preview: 536-2.1a_HW, 11S FIN 536 SU Page 1 of 9 Topic 2.1 International Parity Conditions P7.1-7.5 SolutionBIG MAC INDEX: SHOW ALL YOUR WORK CLEARLY1997 Big Mac Price S SPPPUnder/Over Valuation US $2.42 Argentina Ps 2.50 1.00 Ps/$ 1.0331 Ps/$ $ (U) -3.20% Ps (O) +3.30% Brazil R 2.97 1.06 R/$ 1.2273 R/$ $ (U) -13.63% R (O) +15.78% Chile Ps 1200 417.00 Ps/$ 495.87 Ps/$ $ (U) -15.91% Ps (O) +18.91% Mexico Ps 14.90 7.90 Ps/$ 6.1570 Ps/$ $ (O) + 28.31% Ps (U) -22.06% 1999Big Mac PriceSSPPPUnder/Over ValuationUS$2.43ArgentinaPs 2.501.00 Ps/$1.0288 Ps/$$ (U) -2.80% Ps (O) +2.88%Brazil R 2.951.73 R/$1.2140 R/$$ (O) +42.50% R (U) -29.83%ChilePs 1250484.00 Ps/$514.40 Ps/$$ (U) -5.91% Ps (O) +6.28%MexicoPs 19.909.54 Ps/$8.1893 Ps/$$ (O) + 16.49% Ps (U) -14.16%2002Big Mac PriceSSPPPUnder/Over ValuationUS$2.49ArgentinaPs 2.503.13 Ps/$1.0040 Ps/$$ (O) +211.75% Ps (U) -67.92%Brazil R 3.602.34 R/$1.4458 R/$$ (O) +61.85% R (U) -38.21%ChilePs 1400655.00 Ps/$562.25 Ps/$$ (O) +16.50% Ps (U) -14.16%MexicoPs 21.909.28 Ps/$8.7952 Ps/$$ (O) + 5.51% Ps (U) -5.22%2005Big Mac PriceSSPPPUnder/Over ValuationUS$3.06ArgentinaPs 4.752.90 Ps/$1.5523 Ps/$$ (U) -46.47% Ps (O)+86.82%Brazil R 5.902.47 R/$1.9281 R/$$ (U) -21.94% R (O) +28.11%ChilePs 1500594 Ps/$490.20 Ps/$$ (U) -17.47% Ps (O)+21.18%MexicoPs 28.0010.84 Ps/$9.1503 Ps/$$ (U) 15.59% Ps (O)+18.47%P7.6 SolutionPPP: SHOW ALL YOUR WORK CLEARLY1.$Ps1742.1022.12.1111PPPPPPSS2.S1=3.2 Ps/$ ==> Peso undervalued by%31.6312.31742.13.In addition to high inflation rate, economic crisis, capital outflow.. 536-2.1a_HW, 11S FIN 536 SU Page 2 of 9 P7.16 SolutionPPP: SHOW ALL YOUR WORK CLEARLY1.8484$8614.332760$RM8614.301.104.175.332760)04.1(31500$1111CSSRMCPPPPPPRM2.%118400$8484$Assume PPP holds Exchange rate changes offset inflation rate change Dollar cost has risen by the US inflation Exam Sample Problem 1BIG MAC INDEX: SHOW ALL YOUR WORK CLEARLY Big Mac Price S SPPPUnder/Over Valuation US $2.80 Argentina Ps7.50 3.60 Ps/$ ? ? Canada C$3.50 1.63 C$/$ ? ? Euro 2.90 1.02 $/ ? ? Japan 300 122 /$ ? ? Exam Sample Problem 1 Solution Big Mac Price S SPPPUnder/Over Valuation US $2.80 Argentina Ps7.50 3.60 Ps/$ 2.6786 Ps/$$ (O) + 34.40% Ps (U) -25.59%Canada C$3.50 1.63 C$/$ 1.2500 C$/$$ (O) + 30.40% C$ (U) -23.31%Euro 2.90 1.02 $/ 0.9656 $/$ (U) -5.33% (O) +5.60%Japan 300 122 /$ 107.14 /$$ (O) + 13.87% (U) -12.18%Exam Sample Problem 2PPP: SHOW ALL YOUR WORK CLEARLY Assume that the inflation rate is expected to be 4% in UK and 6% in France. Current exchange rate is 1.50 /. 1.According to PPP, what should be the exchange rate in one year? What should be the exchange rate in three year?...
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536-2.1a_HW[1] - 536-2.1a_HW, 11S FIN 536 SU Page 1 of 9...

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