This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
Unformatted text preview: 5362.1a_HW, 11S FIN 536 – SU Page 1 of 9 Topic 2.1 International Parity Conditions P7.17.5 – 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….. 5362.1a_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?...
View
Full Document
 Spring '11
 Staff
 Exchange Rate, Inflation, International Finance

Click to edit the document details