Question

1. Law of one price. Suppose the price of a pair of Crocs in the U.S. is $10.00 and in the People’s Republic of China (PRC) it is ¥40 (Yuan or RMB), and the current spot exchange rate is: e^¥/_$ = 3.
   1. (5 pts.) Determine the following:

e$/¥ =
e¥/$ Law of One Price =
e$/¥ Law of One Price=
$ Overvalued or Undervalued (circle the correct answer):	Overvalued         Undervalued
¥ Over or Undervalued (circle the correct answer)):	Overvalued         Undervalued

Answer 1

current spot exchange rate is: e^¥/_$ = 3.

The current spot exchange rate of Yuan (¥) per dollar ($) is 3

Current spot exchange rate says that $1 = 3¥

=> ¥ = ($1/3)

=> ¥ = 0.33$

Therefore, e^$/_¥ = 0.33

The e^$/_¥ =0.33 says that 1¥ = 0.33$

The current spot exchange rate of dollar ($) per Yuan (¥) is 0.33

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(2) Suppose the price of a pair of Crocs in the U.S. is $10.00 and in the People’s Republic of China (PRC) it is ¥40

Law of one price (e^¥/_$) = (Price of a pair of crocs in China / Pirce of a pair of shcoks at US)

=> Law of one price (e^¥/_$) = (¥40 / $10)

=> Law of one price (e^¥/_$) = 4

The Law of one price exchange rate of Yuan (¥) per dollar ($) is 4 [i.e., Law of one price (e^¥/_$) is 4)]

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(3)

Suppose the price of a pair of Crocs in the U.S. is $10.00 and in the People’s Republic of China (PRC) it is ¥40

Law of one price (e^$/_¥ ) = (Price of a pair of crocs at US / Pirce of a pair of shcoks at China)

=> Law of one price (e^$/_¥ ) = ($10 / ¥40 )

=> Law of one price (e^$/_¥ ) = 0.25

The Law of one price exchange rate of dollar($) per Yuan (¥) is 0.25 [i.e., Law of one price (e^$/_¥ ) is 0.25)]

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(4) Current spot exchange rate of Yuan (¥) per dollar ($) is 3

Current spot exchange rate says that in exchange of 1$, 3 units of Yuan (i.e.,3¥) will be get.

Law of one price exchange rate of Yuan (¥) per dollar ($) is 4

Law of one price exchange rate says that in exchange of 1$, 4 units of Yuan (i.e.,4¥) will be get.

According to Law of one price the dollar valued more (i.e,4¥)  than current spot exchange rate (i.e.,3¥)

Hence, the dollar ($) is undervalued.

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(5)

Current spot exchange rate of dollar ($) per Yuan (¥) is 0.33

Current spot exchange rate says that in exchange of 1¥, 0.33 units of dollar (i.e.0.33$) will be get.

Law of one price exchange rate of dollar ($) per Yuan (¥) is 0.25

Law of one price exchange rate says that in exchange of 1¥, 0.25 units of dollar (i.e. 0.25$) will be get.

According to Law of one price the Yuan valued less (i.e,0.25$)  than current spot exchange rate (i.e.,0.33$)

Hence, the Yuan (¥) is overvalued.