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# Problem 7.

1 Starbucks in Croatia
Starbucks opened its first store in Zagreb, Croatia in October 2010. The price of a tall vanilla latte
in Zagreb is 25.70kn. In New York City, the price of a tall vanilla latte is \$2.65. The exchange
rate bewteen Croatian kunas (kn) and U.S. dollars is kn5.6288/\$. According to purchasing power
parity, is the Croatian kuna overvalued or undervalued?
Assumptions
Spot exchange rate (Kn/\$)
Price of vanilla latter in Zagreb (kn)
Price of vanilla latter in NYC (\$)
Actual price of Croatian latte in USD
Implied PPP of Croatian latte in USD
Percentage overvaluation (positive) or undervaluation (negative)

Value
5.6288
25.70
2.65
4.57
9.70
112.408%

On January 29.17 b.00% 2.2% annualized.20/\$.2 Crisis at the Heart of Carnaval The Argentine peso was fixed through a currency board at Ps1. . January 29.307% c.2000 2. but also a severe crisis in the balance of payments (see Chapter 4).00% a. What were the probable causes of undervaluation? The rapid decline in the value of the Argentine peso was a result of not only inflation. 2003 (Ps/\$) US inflation for year (per annum) Argentine inflation for year (per annum) Value 1. fixed peg. By what percentage was the Argentine peso undervalued on an annualized basis? c.20 1.20% 1. In January 2002 the Argentine peso was floated.Problem 7.17 -63. Inflation in the United States during that same period was 2.00/\$ throughout the 1990s. What should have been the exchange rate in January 2003 if PPP held? b.0000 3. By what percentage was the Argentine peso undervalued on an annulized basis? Actual exchange rate (Ps/\$) PPP exchange rate (Ps/\$) Percentage overvaluation (positive) or undervaluation (negative) 3.00 20. 2003 it was trading at Ps3. What were the probable causes of undervaluation? Assumptions Spot exchange rate. a. early January 2002 (Ps/\$) Spot exchange rate. During that one year period Argentina's inflation rate was 20% on an annualized basis.20% 20. What should have been the exchange rate in January 2003 if PPP held? Beginning spot rate (Ps/\$) Argentine inflation US inflation PPP exchange rate 1.

(A\$/\$) US inflation for year (per annum) Australian inflation for year (per annum) Value 850. using purchasing power parity.3 Traveling Down Under Terry Lamoreaux has homes in both Sydney. Is the spot rate accurate given both luggage prices? Price of 3-Piece Luggage set in US\$ Price of 3-Piece Luggage set in A\$ Spot rate as determined by PPP Spot rate = Price in A\$ / Price in US\$ 850.13% 1. The US Inflation rate is 1. purchasing power parity is not always an accurate predictor of exchange rate movements.15% and the Australian inflation rate is 3.19 . He's done his research and has decided to go with a Briggs & Riley brand threepiece luggage set.00 1.0941/\$? b. particularly in the short-term. a. is the price of the luggage truly equal if the spot rate is A\$1.00 930.15% 3. 1. Assumptions Price of 3-Piece Luggage set in US\$ Price of 3-Piece Luggage set in A\$ Spot exchange rate. What should be the price of the luggage set in A\$ in 1-year if PPP holds? Beginning spot rate (A\$/\$) Australian inflation US inflation PPP exchange rate Price of 3-Piece Luggage set in US\$ PPP exchange rate Price of 3-piece luggage set in Sydney (A\$) However.1155 850. If the price of the 3-piece luggage set in Phoenix is \$850 and the price of the same 3-piece set in Sydney is \$930.15% 1. high quality luggage.0941 1.0941 a.Problem 7.00 930. Because of his frequent trips he wants to buy some new. determine what the price of the luggage should be in Sydney in one-year time if PPP holds true.13%. There are retails stores in both Phoenix and Sydney.1155 948.00 1.0941 3.00 1. He travels between the two cities at least twice a year.13% a. Terry was a finance major and wants to use purchasing power parity to determine if he is paying the same price no matter where he makes his purcahse. If the price of the luggage remains the same in Phoenix one year from now. Australia and Phoenix. Arizona.

358% -0. the dollar.000 or its yen equivalent.00 Japanese yen START → → 1. If the difference in interest rates is less than the forward premium (or expected change in the spot rate).000. invest in the higher interest yielding currency.042% This tells Takeshi Kamada that he should borrow yen and invest in the higher yielding currency.800% \$ 5.80 ↓ ↓ 603. Assumptions Arbitrage funds available Spot rate (¥/\$) 180-day forward rate (¥/\$) 180-day U.000.800% 3. to lock-in a covered interest arbitrage (CIA) profit. invest in the lower yielding currency.000 55. dollar.S.60 ↑ ↑ ↑ 593.000 Arbitrage Rule of Thumb: If the difference in interest rates is greater than the forward premium/discount.081. dollar interest rate (180 days) 4.120.000 ↑ ↑ ↑ ↑ ↑ Spot (¥/\$) 118.400% 1. U.0240 → → ---------------> 180 days ----------------> → → 1.S. or expected change in the spot rate for UIA.000.000 END Takeshi Kamada generates a CIA profit by investing in the higher interest rate currency.80 4. dollars and Japanese yen.60 117.000 603.S. Difference in interest rates ( i ¥ . dollar interest rate 180-day Japanese yen interest rate Value \$5.0170 → 3. the U.000. He faced the following exchange rate and interest rate quotes. in a covered interest arbitrage between U.136. He wants to invest \$5. and simultaneously selling the dollar proceeds forward into yen at a forward premium which does not completely negate the interest differential.000.400% Japanese yen interest rate (180 days) → \$ 5.i \$) Forward premium on the yen CIA profit potential -1.400% Yen Equivalent 593.Problem 7.000 ↓ ↓ ↓ ↓ ↓ Forward-180 (¥/\$) 117.S.CIA Japan Takeshi Kamada. is exploring covered interest arbitrage possibilities.000 118. a foreign exchange trader at Credit Suisse (Tokyo). .4 Takeshi Kamada -.000.

invest in the lower yielding currency.000.are predicting the spot rate to remain close to ¥118.60 ↑ ↑ ↑ 593. dollar interest rate (180 days) 4.000 ↓ ↓ ↓ ↓ Expected Spot Rate in 180 days (¥/\$) 118.000 if his expectations about the future spot rate.0170 → 3.) .60 117.000 1.120.S.0240 → → ---------------> 180 days ----------------> → → 1.i \$) Expected gain (loss) on the spot rate UIA profit potential -1. the U. observes that the ¥/\$ spot rate has been holding steady. Takeshi wonders if he should try an uncovered interest arbitrage (UIA) and thereby save the cost of forward cover.017% -0.and their computer models -.000 ↑ ↑ ↑ ↑ ↑ Spot (¥/\$) 118.80 118.000 Arbitrage Rule of Thumb: If the difference in interest rates is greater than the forward premium/discount. b) The risk Takeshi is taking is that the actual spot rate at the end of the period can theoretically be anything." as they say. and both dollar and yen interest rates have remained relatively fixed over the past week.081. the one in effect in 180 days.000 118. Credit Suisse (Tokyo). Difference in interest rates ( i ¥ .400% 1.00 4. Many of Takeshi's research associates -.800% 3. he will lose money. better or worse for his speculative position.400% Japanese yen interest rate (180 days) → \$5. A small movement will cost him a lot of money.400% Yen Equivalent 593.00 ↓ ↓ 604.000 END a) Takeshi Kamada generates an uncovered interest arbitrage (UIA) profit of ¥1.00 Japanese yen START → → 1.S. He in fact has very little "wiggle room. If the spot rate ends up any stronger than about 117. analyze the UIA potential. If the difference in interest rates is less than the forward premium (or expected change in the spot rate). Assumptions Arbitrage funds available Spot rate (¥/\$) 180-day forward rate (¥/\$) Expected spot rate in 180 days (¥/\$) 180-day U.000.UIA Japan Takeshi Kamada.S. dollar interest rate 180-day Japanese yen interest rate Value \$5. prove correct. U.00/\$ for the coming 180 days.5 Takeshi Kamada -.000. invest in the higher interest yielding currency.70/\$ in the expected spot rate cell under assumptions.79/\$ (a smaller number).000. (Verify by inputting ¥117.Problem 7.383% This tells Takeshi Kamada that he should borrow yen and invest in the higher yielding currency.079. dollar. Using the same data as in the previous problem.000. or expected change in the spot rate for UIA.800% \$5.160.079.000 603. to potentially gain on an uncovered basis (UIA).

00 84. The 360-day euro-yen deposit rate is 4. and the rate implied by purchasing power parity.900% for the US.90/\$. Forecast inflation is 1.8% (Current Spot Rate .8% (higher in United States) ↔ Purchasing power parity (A) ↕ ↕ ↕ ↕ Forecast difference in rates of inflation -4.90 a.6 Japanese/United States parity conditions Derek Tosh is attempting to determine whether US/Japanese financial conditions are at parity. dollar (¥/\$) exchange rate one year from now.Forward Exchange Rate) / (Forward Exchange Rate) . the markets are indeed in equilibrium -.8% (Dollar expected to weaken) ↔ Difference in nominal interest rates -4. According to Yazzie's calculations. a. The current spot rate is a flat ¥89.90 4.900% 4.parity.100% 5. the implied rate from the international Fisher effect.8% (US higher than Japan) ↕ ↕ ↔ ↔ Fisher effect (B) As is the always the case with parity conditions. Assumptions Forecast annual rate of inflation for Japan Forecast annual rate of inflation for United States One-year interest rate for Japan One-year interest rate for United States Spot exchange rate (¥/\$) One-year forward exchange rate (¥/\$) Value 1.700%. Find the forecasted change in the Japanese yes/U.Problem 7. the future spot rate is implicitly forecast to be equal to the forward rate. and the 360-day euro-dollar deposit rate is 9.8% (Japanese yen at a premium) ↕ ↕ ↕ Interest rate parity (D) Forecast change in spot exchange rate 4.500%.100% for Japan. and 5. Approximate Form Forward rate as an unbaised predictor (E) ↕ ↕ ↕ ↕ ↔ ↔ ↔ ↔ ↕ ↕ ↕ ↕ ↕ International Fisher Effect (C) ↕ ↕ ↕ ↕ Forward premium on foreign currency 4. Diagram and calculate whether international parity conditions hold between Japan and the United States. while the 360-day forward rate is ¥84.500% 89.00/\$.S. b.00 84. Spot exchange rate (¥/\$) One-year forward exchange rate (¥/\$) Forcasted change in exchange rates 89. b.700% 9.

000% 2. in percent (from PPP) Proportion of exchange rate change passed through by Toyota Proportional percentage change Effective exchange rate used by Toyota to price in US\$ for end of year Price of Toyota at end of year (\$) 87. What was the export price for the Corolla at the beginning of the year? Year-beginning price of an Corolla (¥) Spot exchange rate (¥/\$) Year-beginning price of a Corolla (\$) 2. Japan is ¥2. Assuming 75% pass-through. what will the dollar price of a Corolla be at the end of the year? Steps Initial spot exchange rate (¥/\$) Initial price of a Toyota Corolla (¥) Expected US dollar inflation rate for the coming year Expected Japanese yen inflation rate for the coming year Desired rate of pass through by Toyota Value 87.083.200% 0. Assuming partial pass through. Assuming 100% pass-through of exchange rate.000.150.60/\$. The forecast rate of inflation in the United States is 2.000 85.00% 85.178 24.2% per year and is 0. What is the expected spot rate at the end of the year assuming PPP? Initial spot rate (¥/\$) Expected US\$ inflation Expected Japanese yen inflation Expected spot rate at end of year assuming PPP (¥/\$) c.000% 75. The exchange rate is ¥87.543.34 .60 2.150. Assuming purchasing power parity holds.0% per year in Japan.948.000% a.200% 75.000% 1.71 \$ 2. dollars? b. Assuming complete pass through.150.000 2.150. what should the exchange rate be at the end of the year? c. What was the export price for the Corolla at the beginning of the year expressed in U.S.20% 0.000 0. what will the price be in US\$ in one year? Price of Corolla at end of year (¥) Amount of expected exchange rate change.38 \$ b.71 25.Problem 7. what will the dollar price of a Corolla be at the end of the year? d.150.150.000 2.60 24.6500% 86. Use this data to answer the following questions on exchange rate pass through. what will the price be in US\$ in one year? Price of Corolla at beginning of year (¥) Japanese yen inflation over the year Price of Corolla at end of year (¥) Expected spot rate one year from now assuming PPP (¥/\$) Price of Corolla at end of year in (\$) d.7 Corolla Exports and Pass-Through Assume that the export price of a Toyota Corolla from Osaka.000 87. a.60 2.33 \$ 2.

763.1720 ↓ ↓ ↓ kr 30.000% START \$ 5.000 6.31 ↑ ↑ ↑ Forward-90 (kr/\$) 6. Difference in interest rates (ikr .00 → → 1.00 5.860. If the difference in interest rates is less than the forward premium (or expected change in the spot rate).1980 ↑ ↑ ↑ kr 31. .S.8 Copenhagen Covered (A) Heidi Høi Jensen. invest in the higher interest yielding currency. a foreign exchange trader at J. in a covered interest arbitrage with Denmark. Using the following quotes can Heidi make covered interest arbitrage (CIA) profit? Assumptions Arbitrage funds available Spot exchange rate (kr/\$) 3-month forward rate (kr/\$) US dollar 3-month interest rate Danish kroner 3-month interest rate Value \$5.322% This tells Heidi Høi Jensen that he should borrow dollars and invest in the higher yielding currency the Danish kroner.00 ↓ ↓ ↓ ↓ ↓ Spot (kr/\$) 6.263. invest in the lower yielding currency. or the foreign currency equivalent of the bank's short term funds.1980 3.Problem 7.000% Danish kroner interest (3-month) Heidi Høi Jensen generates a covered interest arbitrage (CIA) profit because she is able to generate an even higher interest return in Danish kroner than she "gives up" by selling the proceeds forward at the forward rate.000% Arbitrage Rule of Thumb: If the difference in interest rates is greater than the forward premium/discount.0125 → → \$ 5. can invest \$5 million.000% -1. Morgan Chase.245.00 5.1720 6.500. dollar interest rate (3-month) 3.i\$) Forward discount on the krone CIA profit potential 2.037.P.041.000.750.000.000% 5.000.000. U.31 \$ 3. for CIA profit.0075 → END → ---------------> 90 days ----------------> → → 1.678% 0. or expected change in the spot rate for UIA.

000.050. dollar interest rates are lower.S.678% -0. U.860.00 END a) Heidi Høi Jensen generates a covered interest arbitrage profit of kr54.000. dollar interest rate (3-month) 4. Difference in interest rates (ikr .9 Copenhagen Covered (B) --.860. it must be possible to make CIA profit one way or another.678% This tells Heidi that she should borrow Danish kroner and invest in the LOWER interest rate currency.0125 → 5.000.000% kr Equivalent kr 30.000% -1.150.150 because.Part a Heidi Høi Jensen is now evaluating the arbitrage profit potential in the same market after interest rates change.000% \$ 5.Problem 7. If the difference in interest rates is less than the forward premium (or expected change in the spot rate).750. .000.000 a) a) Arbitrage Rule of Thumb: If the difference in interest rates is greater than the forward premium/discount. the dollar.0100 → → ---------------> 90 days ----------------> → → 1.00 kr 31.00 ↓ ↓ ↓ ↓ ↓ F-90 (kr/\$) 6.1720 ↑ ↑ ↑ kr 30. (Note that anytime the difference in interest rates does not exactly equal the forward premium.i\$) Forward discount on the krone CIA profit potential 1. dollar is selling forward at a premium against the Danish krone. invest in the lower yielding currency.900.245.S.1980 ↓ ↓ kr 31. the U.1720 6.000 6. gaining on the re-exchange of dollars for kroner at the end of the period.00 ↑ ↑ ↑ ↑ ↑ Spot (kr/\$) 6.00 START → → 1.1980 4. invest in the higher interest yielding currency.299. although U.000% Danish kroner interest (3-month) → \$ 5. or expected change in the spot rate for UIA.) Assumptions Arbitrage funds available Spot exchange rate (kr/\$) 3-month forward rate (kr/\$) US dollar 3-month interest rate Danish kroner 3-month interest rate Value \$5.000% 5.00 kr 54.000.S.

000% 6. If the difference in interest rates is less than the forward premium (or expected change in the spot rate).860.000.10 Copenhagen Covered (B) --.1720 ↓ ↓ ↓ kr 30.678% 1.900.1720 6.000. U.0150 → → \$ \$ \$ END 5. while the U. (Note that anytime the difference in interest rates does not exactly equal the forward premium.000% START \$5.000% kr Equivalent kr 30.1980 3. it must be possible to make CIA profit one way or another.000% Danish kroner interest (3-month) b) If the Danish kroner interest rate increases to 6. invest in the higher interest yielding currency. the kroner. or expected change in the spot rate for UIA.00 5.053.S.i\$) Forward discount on the krone CIA profit potential 3.00 → → 1.87 ↑ ↑ ↑ F-90 (kr/\$) 6.Part b Heidi Høi Jensen is now evaluating the arbitrage profit potential in the same market after interest rates change.000 ↓ ↓ ↓ ↓ ↓ Spot (kr/\$) 6.0075 → → ---------------> 90 days ----------------> → → 1. invest in the lower yielding currency.S.210.87.00 6.210. Difference in interest rates (ikr .037. gaining on the re-exchange of kroner for dollars at the end of the period. dollar interest rate stays at 3.) Assumptions Arbitrage funds available Spot exchange rate (kr/\$) 3-month forward rate (kr/\$) US dollar 3-month interest rate Danish kroner 3-month interest rate Value \$5.000.00%.000 b) b) Arbitrage Rule of Thumb: If the difference in interest rates is greater than the forward premium/discount. dollar interest rate (3-month) 3.00% and spot and forward rates remain the same.000% -1.Problem 7.860.1980 ↑ ↑ ↑ kr 31.322% This tells Heidi Høi Jensen that she should borrow US dollars and invest in the HIGHER interest rate currency.710.000 6.87 16. . Heidi Høi Jensen's CIA profit is \$16.500.322.

S.00 1. invest in the higher interest yielding currency.000.000 Arbitrage Rule of Thumb: If the difference in interest rates is greater than the forward premium/discount.S.000. He has \$1 million (or its Swiss franc equivalent) for a short term money market investment and wonders if he should invest in U.46 ↑ ↑ ↑ Forward-90 (SFr.281.538.248.S.2740 4.013.012. invest in the lower yielding currency. dollar interest rate (3-month) 4.46 on each million he invests in the Swiss franc market (by going around the box). in order to earn covered interest arbitrage (CIA) profits. the Swiss franc. dollars and invest in the LOWER yielding currency./\$) 1. If the difference in interest rates is less than the forward premium (or expected change in the spot rate). U.i \$) Forward premium on the Swiss franc CIA profit potential -1.00 ↓ ↓ ↓ ↓ ↓ Spot (SFr. the annual rate of return on this near risk-less investment is: 0.00 → → 1. a covered interest arbitrage profit.S. of \$1.291.200% Swiss franc interest rate (3-month) a) Casper Landsten makes a net profit.281.538.000.800% START \$ 1.538. 1. He faces the following quotes: Assumptions Arbitrage funds available Spot exchange rate (SFr. or make a covered interest arbitrage investment in the Swiss franc. Equivalent SFr./\$) 3-month forward rate (SFr.Problem 7.198% 0. 1.11 Casper Landsten -.2740 ↑ ↑ ↑ SFr.CIA Casper Landsten is a foreign exchange trader for a bank in New York.000.2810 ↓ ↓ ↓ SFr. He should therefore take advantage of it and perform covered interest arbitrage./\$) U. b) Assuming a \$1 million investment for the 90-day period.600% 2.62% . Difference in interest rates ( i SFr.0080 → → \$ 1.2810 1. 1./\$) 1.00 3.800% 3.0120 → END → ---------------> 90 days ----------------> → → 1. or expected change in the spot rate for UIA. dollar 3-month interest rate Swiss franc3-month interest rate Value \$1.46 \$ 1.598% This tells Casper Landsten he should borrow U.000.000 1. dollars for three months. .200% SFr.

2759 ↑ ↑ → SFr. 1.800% return available in US dollars by not covering his forward dollar receipts -. But.UIA Casper Landsten.012.2810/\$). now decides to seek the full 4.12 Casper Landsten -. Assess this decision. not a higher one.000. and then exchanging the Swiss franc proceeds (principle and interest) back into US dollars at whatever the spot rate of exchange is at that time.000. the UIA transaction would not make much sense.Problem 7. it is not a speculation for the weak of heart. Should Casper do it? Well.16 ↑ ↑ ↑ Expected Spot (SFr/\$) 1. and his beliefs on the future spot exchange rate.0120 → END → 1.000.000 1. investing the Swiss francs for 90 days.S.000 U.800% 3. The lower Swiss franc interest rate would yield final dollar proceeds of only \$1.012. so he is placing all of his 'bets' on the exchange rate.000 Since Casper is in the US market (starting point).281. Equivalent SFr. the ending spot rate of exchange would have to be SF1. Assumptions Arbitrage funds available Spot exchange rate (SFr.S. dollar 3-month interest rate Swiss franc3-month interest rate Value \$1./\$) Expected spot rate in 90 days (SFr.200% SFr.at least in his mind -.2700 4.000 ↓ ↓ ↓ ↓ Spot (SFr/\$) 1.008. 1.an uncovered interest arbitrage (UIA) transaction. For an UIA transaction to result in higher dollar proceeds at the end of the 90 day period. depends on his bank's policies on uncovered transactions.281.000 less than simply investing in the US (straight across the top of the box). In this case Casper will have to -.248 ---------------> 90 days ----------------> → → 1.000. if he were to undertake uncovered interest arbitrage he would be first exchange dollars for Swiss francs. a full \$4./\$) 3-month forward rate (SFr. using the same values and assumptions as in the previous question.2740 1.0080 → \$ \$ \$ 3. START \$ 1.291. given that he is invested in a foreign currency with a lower interest rate. . dollar interest rate (3-month) 4.200% Swiss franc interest rate (3-month) If Casper assumed the spot rate at the end of 90 days were the same as the current spot rate (SFr1.029./\$) U.00 1.make some assumption as to what the exchange rate will be at the end of the 90 day period.2810 ↓ ↓ ↓ SFr.2759/\$ or less (a stronger and stronger Swiss franc resulting in more and more US dollars when exchanged). 1.2810 1.800% → → 1.16 29.

1.125% 3. and then sell the Swiss franc principal and interest forward three months locking in a CIA profit. dollar 3-month interest rate Swiss franc3-month interest rate Value \$1. Casper Landsten once again has \$1 million (or its Swiss franc equivalent) to invest for three months. .011875 → END → ---------------> 90 days ----------------> → → 1.S. 1.011.017. 1. If the difference in interest rates is less than the forward premium (or expected change in the spot rate). ./\$) 1. He now faces the following rates.S.238.625% SFr. Should he again ener into a covered interest arbitrage (CIA) investment? Assumptions Arbitrage funds available Spot exchange rate (SFr.339. invest in the higher interest yielding currency.50 3./\$) 3-month forward rate (SFr.200 Arbitrage Rule of Thumb: If the difference in interest rates is greater than the forward premium/discount./\$) U. but counterparty risk still exists if one of his counterparties failed to actually make good on their contractual commitments to deliver the forward or pay the interest) of \$5.00 → → 1.3392 1.191% 2.875. the Swiss franc.13 ↑ ↑ ↑ F-90 (SFr.336. Difference in interest rates ( i SFr.625% Swiss franc interest rate (3-month) Yes.Problem 7.13 on each \$1 million invested. or expected change in the spot rate for UIA.000.238. as it would yield a risk-less profit (exchange rate risk is eliminated with the forward contract.0090625 → → \$ 1.3286 4.i \$) Forward premium on the Swiss france CIA profit -1. Equivalent SFr. dollar interest rate (3-month) 4./\$) 1.200.066% This tells Casper Landsten he should borrow U.000 1.000 ↓ ↓ ↓ ↓ ↓ Spot (SFr.000.30 days later One month after the events described in the previous two questions.3392 ↓ ↓ ↓ SFr.3286 ↑ ↑ ↑ SFr.00 1.339.750% 3. U.351.13 \$ 5. Casper should undertake the covered interest arbitrage transaction. invest in the lower yielding currency. dollars and invest in the lower yielding currency.113.13 Casper Landsten -.S.750% START \$1.

1350/\$. one year from now.25%. Malaysia. The present charge for a luxury suite plus meals in Malaysian ringgit (RM) is RM1.181444 32. a.00 1.212. How many dollars might Theresa expect to need one year hence to pay for her 30-day vacation? b. .250% Spot (expected in 1 year) = Spot x ( 1 + RM inflation) / ( 1 + US inflation) Expected spot rate one year from now based on PPP (RM/\$) Hotel charges expected to be paid one year from now for a 30-day stay (RM) US dollars needed on the basis of these two expectations: 3.250% The dollar cost has risen by the US dollar inflation rate.000. The hotel informed her that any increase in its room charges will be limited to any increase in the Malaysian cost of living. dollar inflation rate expected to be 3.125.13 \$10.S. while U.S.00 2.14 Pulau Penang Island Resort Theresa Nunn is planning a 30-day vacation on Pulau Penang.1350 \$10.00 \$10.000.750% 1. How many dollars might you expecte to need one year hence for your 30-day vacation? Spot exchange rate (ringgit per US\$) Malaysian ringgit inflation rate expected to be U.00 3.00 b.000.045/day.125. She figures out the dollar cost today for a 30-day stay would be \$10.250% a.045. inflation is expected to be only 1.S. By what percent has the dollar cost gone up? Why? Assumptions Charge for suite plus meals in Malaysian ringgit (RM) Spot exchange rate (RM/\$) US\$ cost today for a 30 day stay Malaysian ringgit inflation rate expected to be U. Malaysian inflation is expected to be 2.750% 1. By what percent has the dollar cost gone up? Why? New dollar cost Original dollar cost Percent change in US\$ cost \$10. This is a result of Theresa's estimation of the future suite costs and the exchange rate changing in proportion to inflation (relative purchasing power parity). The Malaysian ringgit presently trades at RM3.Problem 7. dollar inflation rate expected to be Value 1.75% per annum.1350 2.