1. A country has a very relatively high rate of inflation compared to neighbor countries that it trades with. What does the Purchasing Power Parity Theory tell us about this country in terms of inflations impact on what will likely happen to its currency and the resulting effect on : (one sentence maximum each)

Its currency value relative to neighbors in foreign exchange:

Volume of Import Trade into this country with neighbors:

Volume of Export Trade from this country with neighbors:

2. Two countries, Poland and the US produce just one product: mutton meat. Suppose that the price of mutton in the US is $2.80 per pound, and in Poland it is Euro 3.70 per pound.

According to PPP theory, what should the spot exchange rate be for? (test your answer to see if it makes sense)

Ans.1$=______Euro Show why:

Suppose the price of mutton is expected to rise to $3.10 in the US, and to Euro 4.60 in Poland. What should be the one year forward rate be for the two currencies?

Ans. 1$=_______Euro Show why:

3. A U.S. firm that manufactures automated mailboxes has found a client in Chile. The buyer in Chile cannot pay cash and the credit market there makes it impossible to secure financing to buy the product. However, the buyer in Chile knows that he/she can sell the shipped mailboxes swiftly in an all in one profitable transaction. List an option and the process/procedures that the exporter could take in order to make this transaction and sale happen. Your selection should reduce Risk to the exporter of the mailboxes while making the transaction happen. (Countertrade , time draft, extending credit terms are not options-only an answer related to text financing)