Consider the case of the importing company IMP located in country I, which imports its raw materials form exporting company EXP located in country E. According to their contract this year company IMP has to pay E1Million to company EXP for its supplies. The current economic conditions are as follows: S(t=0,E/I)=0.5 Price Index(t=0,E)=1.2 Price Index (t=0,I)=1 The most likely macroeconomic scenario for next year predicts: inflation in country I from t=0 to t=1 at 4% inflation in country E from t=0 to t=1 at 1% A 10% nominal devaluation of currency I relative to currency E a) What is the nominal and real cost of the supplies for company IMP in terms of currency I for year t=0? b) What is the expected nominal and real cost of the supplies for company IMP in terms of currency I if the contract maintains the price of E1Million for year t=1? c) What will be the expected nominal and real cost for firm IMP if the two firms agree on a risk-sharing contract specifying an annual adjustment of the initial price of E1M to compensate inflation in country E, plus an additional adjustment to compensate the real change (real appreciation or real depreciation) of currency I with respect to currency E? (nota bene: the price increases with inflation in E and increases (decreases) with real appreciations (real depreciations) of I.
K2.
Consider the case of the importing company IMP located in country I, which imports its raw materials form exporting company EXP located in country E. According to their contract this year company IMP has to pay E1Million to company EXP for its supplies. The current economic conditions are as follows: S(t=0,E/I)=0.5
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