The Argentine peso was fixed through a currency board at

Ps1.001.00/$

throughout the 1990s. In January 2002, the Argentine peso was floated. On January 29, 2003, it was trading at

Ps3.243.24/$.

During that one-year period, Argentina's inflation rate was

2121%

on an annualized basis. Inflation in the United States during that same period was

2.22.2%

annualized.

a. What should have been the exchange rate in January 2003 if PPP held?

b. By what percentage was the Argentine peso undervalued on an annualized basis?

c. What were the probable causes of undervaluation?

2)

Derek Tosh and Yen-Dollar Parity.Derek Tosh is attempting to determine whether US/Japanese financial conditions are at parity. The current spot rate is a flat

89.0089.00/$,

while the 360-day forward rate is

84.9084.90/$.

Forecast inflation is

1.104 %1.104%

for Japan, and

5.8995.899%

for the US. The 360-day euro-yen deposit rate is

4.7014.701%,

and the 360-day euro-dollar deposit rate is

9.4979.497%.

a. Calculate whether international parity conditions hold between Japan and the United States.

b. Find the forecasted change in the Japanese yen/U.S. dollar (/$) exchange rate one year from now.

3) Starbucks opened its first store in Zagreb, Croatia, in October 2010. In Zagreb, the price of a tall vanilla latte is

25.6625.66

Croatian kunas (kn orHRK). In New York City, the price of a tall vanilla latte is

$2.632.63.

The exchange rate between Croatian kunas and U.S. dollars is

kn 5.6288 equals $ 1kn5.6288=$1.

According to purchasing power parity, is the Croatian kuna overvalued or undervalued?