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Foundations of Financial Management
16th Edition
ISBN: 9781259277160
Author: Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen
Publisher: McGraw-Hill Education
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Question
Chapter 21, Problem 3P
Summary Introduction
To calculate: The relative rate of inflation between the U.S (United States) and Saudi Arabia and also multiply the outcome to riyal exchange rate.
Introduction:
Relative rate of inflation:
It is an economic theory that depicts the relationship between the inflation rates of two different countries over a particular time period.
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Students have asked these similar questions
Answer the following questions related to the foreign exchange rate and market.
(1) The current exchange rate between the U.S. dollar and the Australian dollar is U.S.
$1 = AUD$1.31. If the U.S. dollar is expected to appreciate by 5% relative to the
Australian dollar, what is the new expected exchange rate?
(2) The Argentinean peso trades at 0.06 peso per U.S. dollar. How many Argentinean
pesos would you tip a taxi driver if you give her a $9 bill?
(3) During the 1997 Asian financial crisis, the Thai baht was trading at $0.02475 per Thai
baht. The Thai baht is trading at $0.03093 per Thai baht now. What is the percentage
change in the Thai baht's value? Would you consider it an appreciation or
depreciation?
(4) Suppose that the U.S. Federal Reserve decides to raise interest rates to combat
inflation. How will this decision affect the exchange rate between the U.S. dollar and
the
euro? Discuss with references or a practical example.
From the base price level of 100 in 1979, Saudi Arabian and U.S. price levels in 2008 stood at 280 and 572, respectively. Assume the
1979 $/riyal exchange rate was $0.58/riyal. Suggestion: Using purchasing power parity, adjust the exchange rate to compensate for
inflation. That is, determine the relative rate of inflation between the United States and Saudi Arabia and multiply this times $/riyal of
0.58.
What should the exchange rate be in 2008? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Exchange rate
Iriyal
You observe the following current rates and prices today:
the spot exchange rate today: AU$2.05 per U.K pound;
the price level in Australia today: AU$4.00; and
the price level in the U.K. today: 2.00 pounds
(a) Calculate the real exchange rate of Australia against the U.K., q(AU/UK).
(b) Calculate the over-/under-valuation of the Australian dollar.
Chapter 21 Solutions
Foundations of Financial Management
Ch. 21 - Prob. 1DQCh. 21 - Prob. 2DQCh. 21 - List the factors that affect the value of a...Ch. 21 - Prob. 4DQCh. 21 - Differentiate between the spot exchange rate and...Ch. 21 - What is meant by translation exposure in terms of...Ch. 21 - Prob. 7DQCh. 21 - Prob. 8DQCh. 21 - Prob. 9DQCh. 21 - Prob. 10DQ
Knowledge Booster
Similar questions
- Match each term in Column A with its related definition in Column B. Column A 1. ____________ Spot rate 2. ____________ Currency appreciation 3. ____________ Translation risk 4. ____________ Transaction risk 5. ____________ Exchange rate Column B a. The rate at which one currency can be traded for another currency. b. The possibility that future cash transactions will be affected by changing exchange rates. c. A month ago, 1 U.S. was worth 8.5 Mexican pesos. Today, 1 is worth 9.0 Mexican pesos. The U.S. dollar has undergone what? d. The degree to which a firms financial statements are exposed to exchange rate fluctuation. e. The exchange rate of one currency for another for immediate delivery (today).arrow_forwardFrom base price levels of 100 in 2000, Japanese and U.S. price levels in 2006 stood at 98 and 109, respectively. If the 2000 $: ¥ exchange rate was $0.00928, what should the exchange rate be in 2006? Answer:arrow_forwardOn November 1, 1999, the exchange rate between the Brazilian real and U.S. dollar is R$1.95/$. The consensus forecast for the U.S. and Brazil inflation rates for the next 3-year period is 2.6% and 20.0% per year, respectively. What would you forecast the exchange rate to be at around November 1, 2002? R$3.6673/$ O R$3.1199/$ O R$2.6675/$ O R$2.2807/$arrow_forward
- The theory of purchasing power parity (PPP) states that in the long-run exchange rates between two countries adjusts so that the price of an identical good is the same when expressed in the same currency. A scanner costs £65.45 in England. The spot rate is currently $1.8967 per pound. ST 30378 8330378 Glelbicke Mars ONF LAR Assuming that PPP holds true, what is the price of the scanner in the United States? O $105.52 O $130.35 O $124.14 O $136.55 Suppose the price of the scanner in the United States was actually $136.55. Assuming no transaction costs, transportation costs, or import restrictions, what does PPP predict would happen to the demand for the scanner in the United States? O The demand for the scanner would increase in the United States. O The demand for the scanner would decrease in the United States.arrow_forwardAssume the current U.S. dollar-yen spot rate is $0.0088/¥. Further, the current nominal 1-year rate of return in Japan is -0.112% and 0.14% in the United States. What is the estimated forward exchange rate for 270 days? Use maximal decimals in your calculations. ¥113.42/$ ¥113.85/$ ¥113.64/$ ¥113.35/$arrow_forwardIn the spot market, $1 is currently equal to £.55. The expected inflation rate in the U.K. is 4 percent and in the U.S. 3 percent. What is the expected exchange rate two years from now if relative purchasing power parity exists? £.5391 £.5445 £.5555 £.5611 £.5667arrow_forward
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