1. Currencies – U.S. dollar foreign-exchange rates. May 5, 2011 Country/currency
ID: 2735577 • Letter: 1
Question
1. Currencies – U.S. dollar foreign-exchange rates. May 5, 2011
Country/currency………..in US$..............per US$
British Pound……………….1.5347…………….0.6516
Norwegian Kroner……….0.1690……………..5.9173
Thai Baht……………………..0.0310……………..32.250
Suppose a Big Mac costs $3.27 in Boston, and 101 Thai Baht in Thailand. In this circumstance, what can we say is TRUE?
Purchasing Power Parity does not hold, and Big Macs are relatively expensive in Thailand
Purchasing Power Parity holds, and Big Macs cost the same in these two cities
Purchasing Power Parity does not hold, and Big Macs are relatively cheap in Thailand
Purchasing Power Parity holds, and Big Macs are relatively cheap in Thailand
Purchasing Power Parity holds, and Big Macs are relatively expensive in Thailand
2. What can we infer from the fact that the correlation coefficient between Project George and Project Puddy was 0.00?
That the expected return of the two projects will be zero (or close to zero)
That the projects have a direct relationship with each other
That the covariance between the two projects will be equal to zero
That the state dependent returns must have had equal probability of occurring
That the diversification gain between the two projects will be zero (or close to zero)
a.Purchasing Power Parity does not hold, and Big Macs are relatively expensive in Thailand
b.Purchasing Power Parity holds, and Big Macs cost the same in these two cities
c.Purchasing Power Parity does not hold, and Big Macs are relatively cheap in Thailand
d.Purchasing Power Parity holds, and Big Macs are relatively cheap in Thailand
e.Purchasing Power Parity holds, and Big Macs are relatively expensive in Thailand
Explanation / Answer
Solution of question 1
Exchange rate between US Dollar is Thai Baht = $0.310 per Baht
Cost of Big mac in Boston = $3.27
Cost of Big Mac in Thailand = 101 Baht
Cost of Bing in Thailand is calculate in US Dollar term using Exchange rate of $0.310 per Baht.
Cost of Bing Mac = 101 Baht × $0.0310
= $3.13
Cost of one Bing Mac in Thailand in term of US dollar is $3.13 and cost of same big Mac in US is $3.27. So Purchasing power parity does not exist. Also big Mac is relatively cheap in Thailand compare to USA.
Hence, option (C) is correct answer.
Solution of question 2
Correlation coefficient shows the relationship between two project return and movement of return with respect to each other project return. If correlation coefficient is 1 then there is perfect and direct relationship between two projects return that if return of first project increases by 10% and return of second project is also increase by 10%.
Similarly, if correlation coefficient is -1 then there is perfect but inverse relationship between two project return that if return of first project increases by 10% and return of second project is decrease by 10%.
If Correlation coefficient between two projects is zero it mean there is no relationship between two projects. So, in this case covariance between the two projects will be equal to zero.
Hence, option (C) is correct answer.
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