Question 1 Volvo of Sweden's XC90 Export Pricing Analysis (30 marks total) Volvo Sweden, a leading auto manufacturer in Sweden, was scheduled to launch a new variant of the XC90 SUV in 2013 and was in the midst of generating a complete pricing analysis of the car for sales in Sweden and export. The new variant of the XC90 would be initially priced at Swedish Krone 619,900 in Sweden, and if exported to Australia, the price would be A$92,985 in Australian dollars at the current spot rate of kr6.65 = A$1.00. Volvo intends to raise the price domestically with the rate of Swedish inflation over time, but is worried about how that compares to the export price given Australian dollar inflation and the future exchange rate. Use the following data table to answer the pricing analysis questions below. Calendar year 2017 XC90 Price (Swedis Krone) Swedish Inflation (Forecast) Austrailian Inflation (Forecast) Exchange rate (Krona A$1.00) 2013 619,900 2014 2015 2016 2018 0.28% 2.51% 0.88% 1.51% 1.64% 1.25% 3.45% 1.97% 0.90% 1.96% 6.65 a. If the domestic price of the XC90 increases with the rate of inflation, what would its price be over the 2014-2018 period? (5 marks - 1 mark each year) b. Assuming that the forecasts of Australian and Swedish inflation prove accurate, what would the value of the Krone be over the coming years if its value versus the Australian Dollar followed purchasing power parity? (5 marks - 1 mark each year) c. If the export price of the XC90 were set using the purchasing power parity forecast of the Krone-Australian dollar exchange rate, what would the export price be over the 2014-2018 period? (5 marks - 1 mark each year) d. How would the XC90's export price evolve over time if it followed Swedish inflation and the exchange rate of the Krone versus the Australian dollar remained relatively constant (fixed) over this period of time? (5 marks - 1 mark each year) e. Stefan, one of the newly hired pricing strategists, believes that prices of automobiles in both domestic and export markets will both increase with the rate of inflation, and that the krone/Australian dollar exchange rate will remain fixed. What would this imply or forecast for the future export price of the XC90? (5 marks) f. If you were Volvo, what would you hope would happen to the Swedish Krone value versus the Australian dollar over time given your desire to export the XC90? Now if you combined that 'hope' with some assumptions about the competition -- other automobile sales prices in Australian dollar markets over time, how might your strategy evolve? (5 marks)