PROBLEM 3 RNATİONALEİNANCİALMANAGEMENT (16 POINTS) PART1 PURCHASING POWER THEORY (8POINTS) From the base price level of 100 in 1981, Saudi Arabla and US price levels in 2010 stood at 250 and 100, respectively. Assume the 1981 S/riyal exchange rate was $.46/riyal. Suggestion: Using the purchasing power parity, adjust the exchange rate to compensate for inflation. That is, determine the relative rate of inflation between the United States and Saudi Arabia and multiply this times $/riyal of 46. What should the exchange rate be in 2010? PROBLEM 3 RNATİONALEİNANCİALMANAGEMENT (16 POINTS) PART1 PURCHASING POWER THEORY (8POINTS) From the base price level of 100 in 1981, Saudi Arabla and US price levels in 2010 stood at 250 and 100, respectively. Assume the 1981 S/riyal exchange rate was $.46/riyal. Suggestion: Using the purchasing power parity, adjust the exchange rate to compensate for inflation. That is, determine the relative rate of inflation between the United States and Saudi Arabia and multiply this times $/riyal of 46. What should the exchange rate be in 2010?
1) Inflation rate in Saudi Arabia = 250/100-1 = 150. 00% 2) Inflation rate in US = 100/100-1 = 0. 00% 3) Exchange rate in 2010 = 0.46*(1+0)/(1+1. 5) = 0. 184 $/riyal
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