Q 5(b) [10 Marks]
Serena lives in Buenos Aires and is planning to visit the Machu Picchu in Peru
her summer vacation. The trip will take place in 3 months and is expected to cost
30,000 Peruvian New Sol. The current exchange rate between the dollar and the
peso is 7.80 ARS/USD whereas the exchange rate between the dollar and the sol is
2.76 PEN/USD. Note that USD is the base currency for both exchange rates.
Inflation is expected to hit 30% on annual basis in Argentina, 5% on annual basis in
Peru, and 2% on annual basis in US. The 3-month nominal interest rate in Argentina
is 25% per annum, and she will use PPP to forecast future exchange rates.
What is the total amount of pesos she has to save today to pay for her trip?