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Unformatted text preview: Version A Fin 536 Fall 2011 Quiz 3 Solutions Name________________________ 1. (Fill out the answers, 6pts). a. (Absolute PPP) A Big Mac costs 420 in Japan, while it costs $3.6 in the U.S. The actual market exchange rate is S(/$/)=85. The implied PPP exchange rate is __116.67____/$. The real (effective) exchange rate for is ____1.37_____. The yen is ___ over-valued (over-valued / under-valued) in the market rate. b. (Forecast by the UIRP) The interest rate is 2% in the U.S. and 5% in Australia. Based on the UIRP, we expect the Australian dollar to ___ depreciate ___ (depreciate/appreciate) by ___2.86____% in the next year. c. (Relative PPP) In Jan 2006, the Argentine peso was trading at Peso4.00/$ and the inflation rate was expected to be 25% per year. At the same time the U.S. was expected to have a 3% inflation rate. If PPP held, we would expect the exchange rate to be Peso ___4.85_$ in Jan 2007. In the currency market, the Argentine peso rate was Peso3.8/$ in Jan 2007. We conclude that the peso was__ over-valued ____ (over-valued/under-valued) compared to the PPP exchange rate by ___27.74____ % in Jan 2007. Because of this mis-valuation, we expect that exports of Argentina to the U.S are going to __decrease____(increase/decrease) expect that exports of Argentina to the U....
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- Fall '11
- Exchange Rate