Assume that the export price of a Toyota Corolla from Osaka, Japan is ¥2,150,000. The exchange rate is ¥294/OMR. The forecast rate of inflation in the Oman is 2.2% per year and is 0.0% per year in Japan. Use this data to answer the following questions on exchange rate pass–through. a. What was the export price for the Corolla at the beginning of the year expressed in Omani Rials? b. Assuming purchasing power parity holds, what should the exchange rate be at the end of the year? c. Assuming 100% pass–through of exchange rate, what will be the dollar price of a Corolla at the end of the year?

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A:

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Instruments of Foreign Exchange Market

Foreign exchange is a worldwide market in which one nation’s currency is converted into another nation’s currency. In further terms, exchanging of nations currency with foreign currencies. Foreign exchange happens at a specified rate which is termed the foreign exchange rate. The exchange rates are not constant continuously changing as they are derived by market forces of supply and demand. Widely used foreign currencies are the United States- dollar, Euro, Japanese Yen, British pound, and Australian dollar. US- dollar is the most denominated foreign currency. The Euro to US dollar is a widely used currency pair in the forex market as these two currencies represent the world’s enormous economy. Forex trade is simple as exchanging currencies at the bank. The main players of forex markets are the central banks, financial institutions, intermediaries, investments banks, and other banks. Central Bank is the supreme player who decides the currency value of their own nation on the forex market. Mostly foreign exchange-traded at FX market (forex market) when tourists’ visits a foreign country, import, and export happens between two countries.