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Dollar inflation and the future exchange rate

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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 sell in U.S. dollars at the current spot rate they intend 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 following data table to answer the pricing analysis questions.

Calendar year                                           2001         2002       2003       2004     2005     2006  

Kalina Price (rubles)                                 260,000                      

Russian inflation (forecast)                                        14.0%   14.45%   11.0%   8.0%      8.0%  

U.S. inflation (forecast)                                               2.5%     2.02%     3.0%     3.0%     3.0%  

Exchange rate (rubles = USD 1.00)          32.46

Given the current spot rate, what would be the price of the car in the US market in 2003 assuming PPP holds?

Reference no: EM132460522

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