Inflation and Exchange Rates -

(A) Suppose oranges sell for $2 per dozen in the U.S. and they sell for 200 pesos per dozen in Mexico. Suppose further the exchange rate is $0.01 per peso. If U.S. inflation is 2 percent next year, Mexican inflation is 12 percent, and exchange rates do not change, how could you make an arbitrage profit in the orange market? (PLEASE INCLUDE FORMULAS USED TO SOLVE PROBLEM).

(B) Suppose U.S. interest rates on a risk-free, one-year bond are 3 percent and Mexican interest rates on a risk-free, one-year bond are 12 percent. Suppose further that inflation is 2 percent in the U.S. and 7 percent in Mexico. Assume it takes one year for the exchange rate to adjust to inflation differences. What is the predicted change in the $/peso exchange rate for the next year? Given that, what would the dollar return on a Mexican bond be for this year? (PLEASE INCLUDE FORMULAS USED TO SOLVE PROBLEM).

Labor Costs and Productivity -

(C) Your Texas assembly line employees earn $20 per hour and they produce an average of 8 toaster ovens per hour. You are considering relocating your toaster over assembly facility just across the border to Mexico where wages are only $8 per hour. Transportation costs to your market would be the same. How many toaster ovens per hour would your foreign employees have to produce in order for this move to break even? (PLEASE INCLUDE FORMULAS USED TO SOLVE PROBLEM).

Transportation Costs and Taxes -

(D) Your corporation has all of its operations in California and faces a combined state and federal average corporate tax rate of 20 percent on your annual corporate earnings of $100 million. You could relocate to Nevada and eliminate your corporate state taxes (about half of your corporate tax liability) or you could relocate to Panama and eliminate all of your corporate taxes. The problem is, the vast majority of your market is in California and the transportation costs from Panama would be about $15 million per year. Additional transportation costs from Nevada would be about $1 million. Are you leaving California based on these numbers? (PLEASE INCLUDE FORMULAS USED TO SOLVE PROBLEM).