Theory of purchasing power parity predict

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Reference no: EM1313882

Q1. If the Japanese price level rise by 5% relative to the level in the US. Illustrate what does the theory of purchasing power parity predict will happen to the value of Japanese yen in item of dollars?

Q2. Suppose you have $1 million US dollar credit also have access to the subsequent three spot exchange rates:

0.6158 £/$
10.3250 Dkr/£
6.5445 Dkr/$
Dkr: Danish krone
£: UK pound
$: US dollar

a) Is there any (triangular) arbitrage opportunity? Explain how do you detect it?

b) Explain how large is the net profit if triangular arbitrage is applied?

Reference no: EM1313882

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