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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

PURCHASING POWER PARITY A television costs $500 in the United States. The same television costs 312 5 euros. If purchasing power parity holds, what is the spot exchange rate between the euro and the dollar?

Summary Introduction

To identify: The spot exchange rate using purchase power parity.

Introduction:

Foreign Exchange Rate: Foreign exchange rate refers to the rate required to obtain a currency in other country’s currency.

Purchase Power Parity: Purchase power parity states that purchasing power of two countries is at parity that is. A good purchased in one country with the home currency can be purchased in another country by converting that currency into another country’s currency.

Explanation

Computation of spot exchange rate using purchase power parity:

Given,

Product T in one country is equal to $500.

Product T in another country is equal to 312.5 Euros.

500dollars=312.5euros1

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