In Japan, Honda’s export price per vehicle, FOB (thatmeans free of board) Yokohama, was 5 million yen at a time when theexchange rate was 125 yen per US$. The expected rate of inflationin Japanese yen for the coming year is 1 %. The expected rate ofinflation in US is 3%. Honda actively tries to limit pass throughof exchange rate changes into prices to 60 % of annualchanges.

a. What was the US$ price of aHonda @ the beginning of the year?

b. Assuming purchasing powerparity, what was the expected spot exchange rate @ the end of thecoming year?

c. Assuming 60% pass-throughof exchange rate changes, what would the price of a Honda be @ theend of the coming year in US$?