One year ago the spot exchange rate between the Chilean peso and the U.S. dollar

Question

One year ago the spot exchange rate between the Chilean peso and the U.S. dollar was Ps600.00/$. During the past year, the Chilean peso fell 35% in value against the dollar. During this same 12-month period, prices in the U.S. were stable but Chilean prices rose 24%.

A). What is the actual exchange rate today?

B). What should be the exchange rate today, based on purchasing power parity and assuming the initial year was "normal"?

C). By what percentage is the Chilean peso over or under valued today?

Explanation / Answer

A. Since the Peso fell by 35% The current rate of chilean peso is 600*1.35 = 810 . Actual exchange aret was Ps810.00/$

B. According to PPP, Since the prices in chile rose by 24%, the peso also should raaise by 24%. Hence the exchane rate should have been 600*1.24 = 744 or Ps744.00/$

C. The Peso is undervalued by 8.148%.[( 810-744)/810]

Related Questions

Navigate

• Browse (All)
• Browse O
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.