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A US tourist visiting Sweden wants to buy 6 cases of wine. Each case costs 390SEK. The SEK/USD exchange rate is 6.90. The same 6 cases can be purchased by a US consumer in Detroit for a total of USD250 (total for 6 cases). Please answer the following questions:
a) How much would the US tourist have to pay for the wine in Sweden in USD?
b) What is the real exchange rate between the USD and the SEK?
c) Is the SEK undervalued or overvalued? By how much?
d) If the wine could be purchased in Detroit and sold in Sweden, assuming no transaction costs, how much of an arbitrage profit could be earned in USD?
e) What should be the exchange rate for such of an arbitrage opportunity not to exist?
f) Assuming that the relative-form Purchasing Power Parity stands over the next year, if the expected inflation rate is 3% in Sweden and 2% in the US, what should the spot rate in one year be?
Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..
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