You are working for George Soros and trying to figure out whether to invest $1B

Question

You are working for George Soros and trying to figure out whether to invest $1B in the U.S. or in Turkey. The interest rate for similar assets is 7% in the US and 3% in Turkey. He needs your answer by Wednesday. What can you do? Go the economist.com and check the July 2011 Big Mac Index. What does it suggest will happen to the US$ against the Turkish Lira? Using this information, what advice would you give him? Explain.

U.S. BM Price: 4.07
Turkey BM Price: 6.50
Implied PPP: 1.60
Actual Exchange Rate: 1.72

Explanation / Answer

If you believe in PPP this suggests that the % is overvalued by .12/1.72 or 7% against the Turkish Lira. Probably should invest in Turkey then, given there is only a 4% spread in interest rates.

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