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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

PURCHASING POWER PARITY A television costs $750 in the United States. The same television costs 637.5 euros. If purchasing power parity holds, what is the spot exchange rate between the euro and the dollar?

Summary Introduction

To determine: The spot exchange rate between the euro and the dollar.

Introduction:

Purchasing Power Parity:

It refers to that relationship which indicates the same cost and same kinds of products in the market of various countries after the adjustment of exchange rates of currencies. This relationship of common price can be termed as law of one price.

Explanation

Given information:

The cost of television in the United States is $750.

The cost of same television in the terms of euro is 637.5 euro.

Formula to calculate spot rate,

Spot rate=(Ph)(Pf)

Where,

  • Ph is price of product in home country.
  • Pf is price of product in foreign country

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