International Products Inc has ordered 18,000 leather coats from Argentina for d

Question

International Products Inc has ordered 18,000 leather coats from Argentina for delivery in 6 months. The contracted cost of a coat is 117 pesos. International products will pay for the coats upon delivery. The current indirect exchange rate is $1 for 1.3782 pesos. The anticipated inflation rate is 3.1% in the United States and 8.1% in Argentina. In US dollars, how much will the 18,000 leather coats cost Internstiknal Products at delivery? International Products Inc has ordered 18,000 leather coats from Argentina for delivery in 6 months. The contracted cost of a coat is 117 pesos. International products will pay for the coats upon delivery. The current indirect exchange rate is $1 for 1.3782 pesos. The anticipated inflation rate is 3.1% in the United States and 8.1% in Argentina. In US dollars, how much will the 18,000 leather coats cost Internstiknal Products at delivery?

Explanation / Answer

HI for this problem we will use relative Purchasing power theory,

Relative PP P says:

S1/S0=(1+Iy)/(1+Ix)

where S0= currecnt exchange rate

S1= future exchange rate

Iy= inflation rate in Argentina

Ix= Inflation rate in US

Here time period =6 months =0.5 years(since the delivery is after 6 months)

So our equation for exchange rate after 6 years will be :

S0.5/S0= ((1+IArg.)/(1+I US))^0.5

S0.5/1.3782=((1+0.081)/(1+0.031))^0.5

S0.5= 1.3782*(1.081/1.031)^0.5

S0.5= 1.3782*1.024

S0.5 = 1.4112

Hence after 6 months exchange rate will be = 1USD = 1.4112 pesos

Total quantity = 18,000 coats

So the total cost at USD = 18000*117/1.4112 = USD 1,492,322.22

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