Exchange rate implied by the ipod purchasing power parity

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Reference no: EM131329509

The iPod (nano 2 gigabytes) costs 608 Brazilian reals (BRL) in Brazil and $149.00 in the US. The actual market exchange rate between the Brazilian real and the U.S. dollar is 0.4 US$ per BRL.

a) What is the dollar cost (in US$) of the iPod sold in Brazil?

b) What is the exchange rate ($/real) implied by the iPod Purchasing Power Parity?

c) Comparing the actual market exchange rate to the one implied by the iPod PPP, determine whether the BRL is over/under valued and by how much in percentage terms?

d) What is the profitable trading strategy, that is, which currency would you go long (buy) and which short (sell)?

Reference no: EM131329509

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