Homework problems -chapter 6
Please work and post your answers to problems
6.1 Malaysian Island Resort. Theresa Nunn is planning a 30-day vacation on Pulau Penang, Malaysia, one year from now. The present charge for a luxury suite plus meals in Malaysian ringgit (RM) is RM1,045/day. The Malaysian ringgit presently trades at RM3.1350/$. She determines that the dollar cost today for a 30-day stay would be $10,000. The hotel informs her that any increase in its room charges will be limited to any increase in the Malaysian cost of living. Malaysian inflation is expected to be 2.75% per annum, while U.S. inflation is expected to be 1.25%. How many dollars might Theresa expect to need one year hence to pay for her 30-day vacation? By what percent will the dollar cost have gone up? Why?
6.6 Toyota’s Pass-Through. Assume that the export price of a Toyota Corolla from Osaka, Japan, is ¥2,150,000. The exchange rate is ¥87.60/$. The forecast rate of inflation in the United States is 2.2% per year and in Japan it is 0.0% per year. Use these 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 U.S. dollars?
B. Assuming purchasing power parity holds, what should be the exchange rate at the end of the year?
C Assuming 100% exchange rate pass-through, what will be the dollar price of a Corolla at the end of the year?
D Assuming 75% exchange rate pass-through, what will be the dollar price of a Corolla at the end of the year?
6.19 Maltese Falcon: The Black Bird. Imagine that the mythical solid gold falcon, initially intended as a tribute by the Knights of Malta to the King of Spain in appreciation for his gift of the island of Malta to the order in 1530, has recently been recovered. The falcon is 14 inches high and solid gold, weighing approximately 48 pounds. Assume that gold prices have risen to $440/ounce, primarily as a result of increasing political tensions. The falcon is currently held by a private investor in Istanbul, who is actively negotiating with the Maltese government on its purchase and prospective return to its island home. The sale and payment are to take place one year from now, and the parties are negotiating over the price and currency of payment. The investor has decided, in a show of goodwill, to base the sales price only on the falcon’s specie value—its gold value. The current spot exchange rate is 0.39 Maltese lira (ML) per 1.00 U.S. dollar. Maltese inflation is expected to be about 8.5% for the coming year, while U.S. inflation, on the heels of a double-dip recession, is expected to come in at only 1.5%. If the investor bases value in the U.S. dollar, would he be better off receiving Maltese lira in one year (assuming purchasing power parity) or receiving a guaranteed dollar payment (assuming a gold price of $420 per ounce one year from now)?
Please follow the following instructions in completing and posting your answers
The best way to solve the problems assigned each week is the following systematic and deliberate approach
- write a short narrative of what the problem is calling for and the formulas that you will need to get the answer (b) separate the data given (c) create a work station that you do intermediate calculations ( d) check to see if the answer that you have gotten matches what you were looking for and box your response