Quiz 3 (Version B)Solution

# Quiz 3 (Version B)Solution - Version B Fin 536 Fall 2011...

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Version B Fin 536 Fall 2011 Quiz 3 Solutions Name________________________ 1. (Fill out the answers, 6pts). a. (Absolute PPP) A Big Mac costs ¥410 in Japan, while it costs \$3.9 in the U.S. The actual market exchange rate is S(¥/\$/)=125. The implied PPP exchange rate is ¥____105.13_/\$. . The real (effective) exchange rate for ¥ is ___0.841______. The yen is __ under-valued (over-valued / under-valued) in the market rate. b. (Forecast by the UIRP) The interest rate is 3% in the U.S. and 10% in Australia. Based on the UIRP, we expect the Australian dollar to ____ depreciate ___ (depreciate/appreciate) by ____6.36____% 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 45% 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 ___5.63___\$ 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 ___48.16____ % in Jan 2007. Because of this mis-valuation, we

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## This note was uploaded on 12/06/2011 for the course FIN 536 taught by Professor Staff during the Fall '11 term at S.F. State.

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Quiz 3 (Version B)Solution - Version B Fin 536 Fall 2011...

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