Question

AvtoVAZ of​ Russia's Kalina Export Pricing Analysis. AvtoVAZ​ OAO, a leading auto manufacturer in​ Russia, was launching a new automobile model in​ 2001, and is in the midst of completing a complete pricing analysis of the car for sales in Russia and export. The new​ car, the​ Kalina, would be initially priced at Rubles 260,000 in Russia and if​ exported,  $8,666.67 in U.S. dollars at the current spot rate of Rubles 3030​= $1.00. AvtoVaz intends to raise the price domestically with the rate of Russian inflation over​ time, but is worried about how that compares to the export price given U.S. dollar inflation and the future exchange rate. Use the data​table,  to answer the pricing analysis questions.

Calendar Year	2001	2002	2003	2004	2005	2006
Kalina Price (rubles)	260,000
Russian Inflation (forecast)		13.8%	12.1%	10.9%	8.1%	8.1%
U.S. inflation (forecast)		2.5%	2.8%	2.8%	2.8%	2.8%
Exchange rate (rubles=USD 1.00)	30

a. If the domestic price of the Kalina increases with the rate of​ inflation, what would be its price over the​ 2002-2006 period?

b. Assuming that the forecasts of U.S. and Russian inflation prove​ accurate, what would be the value of the ruble over the coming years if its value versus the dollar followed purchasing power​ parity?

c. If the export price of the Kalina were set using the purchasing power parity forecast of the​ ruble-dollar exchange​ rate, what would be the export price over the​2002-2006 period?

d. How would the​ Kalina's export price evolve over time if it followed Russian inflation and the exchange rate of the ruble versus the dollar remained relatively constant over this period of​ time?

e. ​Vlad, one of the newly hired pricing​ strategists, believes that prices of automobiles in both domestic and export markets will both increase with the rate of​ inflation, and that the​ ruble-dollar exchange rate will remain fixed. What would this imply or forecast for the future export price of the​ Kalina?

f. If you were​ AvtoVaz, what would you hope would happen to the​ ruble's value versus the dollar over time given your desire to export the​ Kalina? Now if you combined that​ "hope" with some assumptions about the competitionlong dash—other automobile sales prices in dollar markets over timelong dash—how might your strategy​ evolve?

g. So what did the Russian ruble end up doing over the​ 2001-2006 period?

Answer 1

You have asked a question with 7 sub parts. I have addressed the first four parts here. Please post the balance three sub parts as a separate question.

Part (a)

Please see the table below. Domestic prices will rise in line with Russian inflation.

Calendar Year		2001	2002	2003	2004	2005
Kalina Price (rubles)		260,000	295,880	331,681	367,835	397,629
Russian Inflation (forecast)			13.80%	12.10%	10.90%	8.10%

Price in 2002 = Price in 2001 x (1 + Russian inflation) = 260,000 x (1 + 13.8%) = 295,880

Price in 2003 = 295,880 x (1 + 12.10%) = 331,681 and so on....

Part (b)

Exchange rate (Rubles / $) = Spot rate (Rubles / $) x (1 + i_Rubles) / (1 + i_$)

Value of Ruble in terms of $ will be 1 / Exchange rate calculated above.

Please see the table below:

Calendar Year		2001	2002	2003	2004	2005
Russian Inflation (forecast)			13.80%	12.10%	10.90%	8.10%
U.S. inflation (forecast)			2.50%	2.80%	2.80%	2.80%
Exchange rate (rubles=USD 1.00)		30.0000	33.3073	36.3205	39.1824	41.2025
Value of rubles in terms of $ (1 ruble = ?? $)			0.0300	0.0275	0.0255	0.0243

Value of rubles will decline over coming years.

Part (c)

Please see the table below:

Calendar Year		2001	2002	2003	2004	2005
Kalina Price (rubles)	A	260,000	295,880	331,681	367,835	397,629
Russian Inflation (forecast)			13.80%	12.10%	10.90%	8.10%
U.S. inflation (forecast)			2.50%	2.80%	2.80%	2.80%
Exchange rate (rubles=USD 1.00)	B	30.0000	33.3073	36.3205	39.1824	41.2025
Export Price	C = A / B	8,666.67	8,883.33	9,132.07	9,387.76	9,650.62

Part (d)

Please see the table below. Exchange rate is kept constant at 30.

Calendar Year		2001	2002	2003	2004	2005
Kalina Price (rubles)	A	260,000	295,880	331,681	367,835	397,629
Exchange rate (rubles=USD 1.00)	B (Constant at 30)	30.0000	30.0000	30.0000	30.0000	30.0000
Export Price	C = A / B	8,666.67	9,862.67	11,056.05	12,261.16	13,254.31