Assuming purchasing power parity

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Reference no: EM131947032

In Japan, Honda’s export price per vehicle, FOB (that means free of board) Yokohama, was 5 million yen at a time when the exchange rate was 125 yen per US$. The expected rate of inflation in Japanese yen for the coming year is 1 %. The expected rate of inflation in US is 3%. Honda actively tries to limit pass through of exchange rate changes into prices to 60 % of annual changes.

a. What was the US$ price of a Honda @ the beginning of the year?

b. Assuming purchasing power parity, what was the expected spot exchange rate @ the end of the coming year?

c. Assuming 60% pass-through of exchange rate changes, what would the price of a Honda be @ the end of the coming year in US$?

Reference no: EM131947032

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