C. 1)The inflation rates in the British pound and the Australian dollar are 2% and 8%...

C. 1)The inflation rates in the British pound and the Australian dollar are 2% and 8% respectively. What should the Sex /Forward ER be, if the Spot ER is BP/ A$ .5? 2) Describe the concept of purchasing power.

Please Show Work, Thank you.

Solutions

Expert Solution

1) CORRECT SOLUTION FORWARD EXCHANGE RATE BP / A$ = 0.4722

AS PER THEORY ON PURCHASING POWER PARITY

FORWARD EXCHANGE RATE = SPOT EXCHANGE RATE * (1+ i pound inflation) / (1 + i aud inflation)

FORWARD EXCHANGE RATE = 0.50 * (1.02) / (1.08)

FORWARD EXCHANGE RATE = 0.50 * 0.9444444444444..

FORWARD EXCHANGE RATE = 0.472222.. or 0.4722 (rounded-off)

2) CONCEPT OF PURCHASING POWER PARITY

PPP theory is generary known as "law of one price". the markets provides same price for a good in two countries.

it states that it will be indifferent for a person to purchase a good from different countries at different prices

e. g. Mr.A buy a iphone for 150 british pounds in uk

EXCHANGE RATES pound = 2.40 usd , pound = 100 inr

if he wants to buy it in usa, it will cost 360 usd (150 * 2.40)

if he wants to buy it in INDIA, it will cost 15,000 RUPEE (150 * 100)

So, it will not be any cheaper or expensive to buy iphone in any country

similarly

it will also help in finding future exchange rates as exchange rates are dependent on inflation rates of that countries

FORWARD EXCHANGE RATE = SPOT EXCHANGE RATE * (1+ i pound inflation) / (1 + i aud inflation)

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

The inflation rates in the British pound and the Australian dollar are 2% and 8% respectively....

The inflation rates in the British pound and the Australian dollar are 2% and 8% respectively. What should the Sex /Forward ER be, if the Spot ER is BP/ A$ .1? Describe the concept of purchasing power.

Question: 1. The exchange rate between the British pound and the Australian dollar (GBP/AUD) is 0.2650......

Question: 1. The exchange rate between the British pound and the Australian dollar (GBP/AUD) is 0.2650... 1. The exchange rate between the British pound and the Australian dollar (GBP/AUD) is 0.2650, it means a(an) (a) indirect quote from an Australian perspective with a rate of 3.7735 (b) indirect quote from an Australian perspective with a rate of 0.2650 (c) indirect quote from a British perspective with a rate of 0.2650 (d) direct quote from a British perspective with a rate...

Quotes for the Dollar against the British pound: 0.7855 – 0.7925 Quotes for the British pound...

Quotes for the Dollar against the British pound: 0.7855 – 0.7925 Quotes for the British pound against the dollar: 1.4475- 1.4755. 1) Which market would you use of you want to BUY dollars? 2) Which market would you use if you want to SELL dollars?

The current dollar−pound exchange rate is $2 per British pound. A U.S. basket that costs $100...

The current dollar−pound exchange rate is $2 per British pound. A U.S. basket that costs $100 would cost $140 in the United Kingdom. For the next year, the U.S. Fed is predicted to keep U.S. inflation at 2% and the Bank of England is predicted to keep U.K. inflation at 3%. The speed of convergence to absolute PPP is 15% per year. 1. (Scenario: Monetary Approach in the Long-run) What is the current U.S. real exchange rate with the United...

The New Zealand dollar to U.S. dollar exchange rate is 1.34 , and the British pound...

The New Zealand dollar to U.S. dollar exchange rate is 1.34 , and the British pound to U.S. dollar exchange rate is .63. If you find that the British pound to New Zealand dollar were trading at .51 , what would be the riskless profit per U.S. dollar invested?

If the British pound depreciates against the U.S. dollar Select one: A. British consumers lose by...

If the British pound depreciates against the U.S. dollar Select one: A. British consumers lose by a decrease in the pound price of U.S. exports to Britain. B. British consumers gain by a decrease in the pound price of U.S. exports to Britain. C. British businesses gain by an increase in the dollar price of exports to the United States. D. U.S. consumers win by a decrease in the dollar price of British exports to the United States.

If the British pound depreciates against the U.S. dollar Select one: British businesses gain by an...

If the British pound depreciates against the U.S. dollar Select one: British businesses gain by an increase in the dollar price of British exports to the United States. British consumers lose by an increase in the pound price of U.S. exports to Britain. British consumers gain by a decrease in the pound price of U.S. exports to Britain. U.S. consumers lose by an increase in the dollar price of British exports to the United States.

what are the british pound vs U.S dollar advantages and disadvantages?

Facts: (Note £=British Pound Sterling, C$=Canadian Dollar, U.S.$=United States Dollar) A small Canadian company has contracted...

Facts: (Note £=British Pound Sterling, C$=Canadian Dollar, U.S.$=United States Dollar) A small Canadian company has contracted to purchase 100,000 toys for £3.50 each from a British company. The Canadians have agreed to pay the Brits in pounds sterling (£). The Canadians have also agreed to then sell those toys to a U.S. company for US$5.50 per toy. The Canadian company has agreed to accept U.S. dollars but plans to convert these revenues to Canadian dollars. The Canadian company estimates its...

If the British pound and Euro are both appreciating relative to the dollar, how does this...

If the British pound and Euro are both appreciating relative to the dollar, how does this impact exports and imports, AD and GDP? What should the Fed. due to respond?

Subjects