Terry Lamoreaux has homes in both Sydney, Australia and Phoenix, United States. He travels between the two cities at least twice a year. Because of his frequent trips he wants to buy some new, high quality luggage. He's done his research and has decided to go with a Briggs & Riley brand three-piece luggage set. There are retails stores in both Phoenix and Sydney. Terry was a finance major and wants to use purchasing power parity to determine if he is paying the same price no matter where he makes his purcahse. a. If the price of the 3-piece luggage set in Phoenix is $850 and the price of the same 3-piece set in Sydney is $930, using purchasing power parity, is the price of the luggage truly equal if the spot rate is A$1.0941/S? b. If the price of the luggage remains the same in Phoenix one year from now, determine what the price of the luggage should be in Sydney in one-year time if PPP holds true. The US Inflation rate is 1.15% and the Australian inflation rate is 3.13%. Assumptions Price of 3-Piece Luggage set in USS Price of 3-Piece Luggage set in AS Spot exchange rate, (AS/S) US inflation for year (per annum) Australian inflation for year (per annum) What is the spot rate as determined by PPP? .9597 1.1121 1.0941 1.1155 Value 850.00 930.00 1.0941 1.15% 3.13%
Terry Lamoreaux has homes in both Sydney, Australia and Phoenix, United States. He travels between the two cities at least twice a year. Because of his frequent trips he wants to buy some new, high quality luggage. He's done his research and has decided to go with a Briggs & Riley brand three-piece luggage set. There are retails stores in both Phoenix and Sydney. Terry was a finance major and wants to use purchasing power parity to determine if he is paying the same price no matter where he makes his purcahse. a. If the price of the 3-piece luggage set in Phoenix is $850 and the price of the same 3-piece set in Sydney is $930, using purchasing power parity, is the price of the luggage truly equal if the spot rate is A$1.0941/S? b. If the price of the luggage remains the same in Phoenix one year from now, determine what the price of the luggage should be in Sydney in one-year time if PPP holds true. The US Inflation rate is 1.15% and the Australian inflation rate is 3.13%. Assumptions Price of 3-Piece Luggage set in USS Price of 3-Piece Luggage set in AS Spot exchange rate, (AS/S) US inflation for year (per annum) Australian inflation for year (per annum) What is the spot rate as determined by PPP? .9597 1.1121 1.0941 1.1155 Value 850.00 930.00 1.0941 1.15% 3.13%
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Terry Lamoreaux has homes in both Sydney, Australia and Phoenix, United States. He travels
between the two cities at least twice a year. Because of his frequent trips he wants to buy
some new, high quality luggage. He's done his research and has decided to go with a Briggs
& Riley brand three-piece luggage set. There are retails stores in both Phoenix and Sydney.
Terry was a finance major and wants to use purchasing power parity to determine if he is
paying the same price no matter where he makes his purcahse.
a. If the price of the 3-piece luggage set in Phoenix is $850 and the price of the same 3-piece
set in Sydney is $930, using purchasing power parity, is the price of the luggage truly equal if
the spot rate is A$1.0941/S?
b. If the price of the luggage remains the same in Phoenix one year from now, determine what
the price of the luggage should be in Sydney in one-year time if PPP holds true. The US
Inflation rate is 1.15% and the Australian inflation rate is 3.13%.
Assumptions
Price of 3-Piece Luggage set in USS
Price of 3-Piece Luggage set in AS
Spot exchange rate, (AS/S)
US inflation for year (per annum)
Australian inflation for year (per annum)
What is the spot rate as determined by PPP?
.9597
1.1121
1.0941
1.1155
Value
850.00
930.00
1.0941
1.15%
3.13%
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