Foundations Of Finance
10th Edition
ISBN: 9780134897264
Author: KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher: Pearson,
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Chapter 16, Problem 12SP
(Purchasing-power parity) Let’s assume a McDonald’s Big Mac costs 2.44 yuan in China but costs $4.20 in the United States. Assuming that purchasing-power parity (PPP) holds, how many Chinese yuan are required to purchase 1 U.S. dollar?
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If a Big Mac costs 550 yen in Japan and the exchange rate of Japanese yen against US dollar is 100 yen/$, and a Big Mac costs $5 in the U.S., does PPP hold? (show your calculations instead of only answering Yes or No)
Let a Big Mac hamburger in the U.K sell for £1.99. Also, let the same hamburger sell for $2.71 in the U.S. Finally, the actual exchange rate (to buy $1.00 with British pounds) is 0.63. According to ------, the British pound is ------ vs the US dollar.
a . interest-rate parity - overvalued
b . purchasingpower parity - overvalued
c . purchasing-power parity - undervalued
d . interest-rate parity - undervalued
A computer costs $ 1,300 in the United States. The same computer cost £1100 in Europe. Assuming that the purchasing power parity (PPP) strictly holds, what is the spot exchange rate between the dollar and the euro?
Chapter 16 Solutions
Foundations Of Finance
Ch. 16 - Prob. 1RQCh. 16 - Prob. 2RQCh. 16 - What is meant by arbitrage profits?Ch. 16 - Prob. 4RQCh. 16 - Prob. 5RQCh. 16 - Prob. 6RQCh. 16 - Prob. 7RQCh. 16 - Prob. 8RQCh. 16 - Prob. 9RQCh. 16 - Prob. 1SP
Ch. 16 - Prob. 2SPCh. 16 - Prob. 3SPCh. 16 - Prob. 4SPCh. 16 - (Exchange rate arbitrage) You own 10,000. The...Ch. 16 - Prob. 6SPCh. 16 - Prob. 7SPCh. 16 - Prob. 8SPCh. 16 - Prob. 9SPCh. 16 - Prob. 10SPCh. 16 - Prob. 11SPCh. 16 - (Purchasing-power parity) Lets assume a McDonalds...Ch. 16 - Prob. 1MCCh. 16 - Prob. 2MCCh. 16 - Prob. 3MCCh. 16 - d. What are the differences among a forward...Ch. 16 - Prob. 5MCCh. 16 - Prob. 6MCCh. 16 - Selling Quotes for Foreign Currencies in New York...Ch. 16 - Prob. 8MCCh. 16 - Prob. 9MC
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- A computer costs $560 in the United States. The same model costs 640 in France. If purchasing power parity holds, what is the spot exchange rate between the euro and the dollar? Do not round intermediate calculations.arrow_forwardThe popular Big Mac burger will cost 800 tenge (US$2.32), while Happy Meals will be from 1,050 tenge (US$3.04), if Big Mac costs 5,5$ in the USA, how can i calculate Big Mac index? explore whether it is over or undervalued against the U.S.dollar and other major currencies, and analyzewhy.arrow_forwardIn the spot market, 7.8 pesos can be exchanged for 1 U.S. dollar. A pairof headphones costs $15 in the United States. If purchasing power parityholds, what should be the price of the same headphones in Mexico?arrow_forward
- Sing Tao wants to import goods for 2.12 million Australian dollar (A$) and pay to Australian exporter, WA Co., in one year. Sing Tao also wants to minimise its exchange rate risk for the payment of A$2.12 million by taking the money market hedging strategy. Calculate the Chinese yuan (CNY) costs using the money market hedging strategy based on the information in Table 1. (Enter the whole number without sign and symbol). TABLE 1 For Chinese yuan (CNY) Spot rate A$0.3213/CNY One-year forward rate A$0.2381/CNY One-year CNY deposit and borrowing rate 3.21% One-year call options Exercise price = A$0.31 Premium = A$0.02 One-year put options Exercise price = A$0.53 Premium = A$0.03 For Australian dollar (A$) Spot rate CNY3.4201/A$ One-year forward rate CNY1.213/A$ One-year A$ deposit and borrowing rate 2.31% One-year call options Exercise price = CNY2.34 Premium = CNY0.12…arrow_forwardA computer costs $660 in the United States. The same model costs €515 in France. If purchasing power parity holds, what is the spot exchange rate between the euro and the dollar? Do not round intermediate calculations. Round your answer to two decimal places. 1 euro = $arrow_forwardSuppose the average price of a Big Mac in the United States is $3.50 while in Japan the average price is 400 yen. If the price of a dollar is 100 yen per dollar, the purchasing power parity model of exchange rate determination suggests: The yen is overvalued. The yen is undervalued. The price of a Big Mac in Japan will rise. The dollar will depreciate against the yen.arrow_forward
- Sing Tao wants to import goods for 2.54 million Australian dollar (A$) and pay to Australian exporter, WA Co., in one year. Sing Tao also wants to minimise its exchange rate risk for the payment of A$2.54 million by taking the forward market hedging strategy. Calculate the Chinese yuan (CNY) costs using the forward market hedging strategy based on the information in Table 1. (Enter the whole number without sign and symbol).arrow_forwardA laptop computer costs £1,100 in Europe. The same computer cost GHC 1,540 in Ghana. If we assume that the law of one price (LOP) holds, what is the spot exchange rate between the GHC and the euro?arrow_forwardIf British pounds sell for $1.30 (U.S.) per pound, what should dollars sellfor in pounds per dollar?arrow_forward
- Suppose a bank provides the following quotes: Bid 1.2567 CAD per U.S. Dollar and Ask 1.2682 CAD per U.S. Dollar Suppose you would like to buy Canadian Dollars and sell U.S. Dollars. Given the quotes above, what rate would you receive? Group of answer choices 0.0115 CAD per USD 2.5249 CAD per USD 1.2682 CAD per USD 1.2567 CAD per USDarrow_forwardE) Ifthe Malaysian price level rises by 6% relative to the price level in the United States, what does the theory of Purchasing Power Parity predict will happen to the value of the Malaysian ringgit in term of Dollars?arrow_forwardIf a Japanese car costs 1,500,000 yen, a similar American car costs $30,000, and a dollar can buy 100 yen, what are the nominal and real exchange rates?arrow_forward
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