Question

38) The current spot rate between the pound and dollar is £.7592/S. The expected in the U-S is 2.87 percent and the expected inflation rate in the U.K. is 1.94 percent. As power parity holds, what will the exchange rate be next year? relative purchasing A) £.7957/S B) £.7663 /S C £.7521 /S D) £.7822 /S E) £.7822 /S 39) Absolute purchasing power parity is most likely to exist for which one of the t A) B) C) D) E) A BMW convertible A MacBook An ounce of gold A foldable cell phone A bottle of perfume 0) Which one of the following is the risk that a firm faces when it opens a facil ountry, given that the exchange rate between the firm's home country and thi uctuates over time? ) Exchange rate risk ) Purchasing power risk Political risk ) International risk ) Diversifiable risk

Answer 1

38. Current Spot Rate = 1 $ = Pound 0.7592

Future Rate 1 $ * Exp(0.0287) = Pound 0.7592 * Exp(0.0194)

1 $ * 1.0195 = 0.7592 * 1.0291

1$ = Pound 0.7663

Option B

39. Option C. An Ounce of Gold

40. Option A. exchange rate risk. As there will be exchange of currency it will result in exchange rate risk