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1. Suppose an American visits a particular market in India. The visitor bought 25 cupcakes for 250 Indian rupees and remarked that cupcakes are quite cheaper in India. The visitor claimed that on an average 25 such cupcakes cost $6. Based on the given information calculate the purchasing power parity between the two countries.

2. Suppose that the treasurer of IBM has an extra cash reserve of $100,000,000 to invest for six months. The six-month interest rate is 8 percent per annum in the United States and 7 percent per annum in Germany. Currently, the spot exchange rate is 1.01 per dollar and the six-month forward exchange rate is 0.99 per dollar. The treasurer of IBM does not wish to bear any exchange risk. Where should he/she invest to maximize the return?

3. In the issue of October 23, 1999, the Economist reports that the interest rate per annum is 5.93% in the United States and 70.0% in Turkey. Why do you think the interest rate is so high in Turkey? Based on the reported interest rates, how to predict the change of the exchange rate between the U.S. dollar and the Turkish lira?

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Answers Only 1 Purchasing Power Parity PPP We cant directly calculate PPP with the given information... View the full answer