Pinot Noir wine is produced in the U.S. and Australia. Equivalent bottles
sell in the U.S. for U.S.$22 and in? and in Australia A$34.
a.According to the theory of Purchase Power Parity, what should the Exchange Rate Be?
b.Suppose the price is expected to increase to $27 in the U.S. and A$44 in Australia over the next year. What do you suppose the one year forward exchange rate be?
c.In risk free interest rates are 5% in the U.S., what do you suppose the corresponding interest rates in Australia are?
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