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Calculate export price of alaso in us dollar

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Reference no: EM132415116

1. Honda, Japanese company has launched its new car named Alaso. Given the current exchange rate is ¥88.50/$, Alaso is sold at the current export price of a ¥3,250,000. The forecast rate of inflation in the United States is 3.4% per year and is 0.0% per year in Japan. Answer all the following questions:

a. At the beginning of year, calculate export price of Alaso in U.S dollar.

b. Assuming purchasing power parity holds, what should the exchange rate be at the end of the year?

c. What will be the dollar price of an Alaso at the end of the year given 100% pass-through of exchange rate?

d. What will be the dollar price of an Alaso at the end of the year given 75% pass-through of exchange rate?

2. Mr. Bernard specializes in cross-rate arbitrage. He notices that the current spot exchange rate is RM4.10/USD and the one-year forward exchange rate is RM4.20/USD. The one-year interest rate is 2.5% in Ringgit and 2.2% in US Dollars. Mr. Bernard is able to borrow RM1, 000,000 or an equivalent amount of USD243, 902.44 at the current spot exchange rate.

Required

a) If Mr. Bernard is a Malaysian-based investor, is there a guaranteed profit from covered interest arbitrage? Calculate the amount of arbitrage profit or loss

b) Assume that Mr. Bernard is a US Dollar-based investor, determine the arbitrage process and calculate the amount of arbitrate profit or loss equivalent to the US Dollar.

3. Assuming you have $1500, can you use triangular arbitrage to generate a profit? Explain the strategy and order of transactions that are necessary for earning the profit. On the other hand, explain 'why' if you think profit is unattainable. Use the following information for making possible arbitrage strategy:-

a) You can buy a euro for 11 pesos. The bank will pay you 10 pesos for a euro.

b) You can buy a U.S. dollar for .9 euros. The bank will pay you .8 Euros for a U.S. dollar.

c) You can buy a U.S. dollar for 10 pesos. The bank will pay you 9 pesos for a U.S. dollar.

Reference no: EM132415116

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