TOPIC

POINT / COUNTER-POINT DISCUSSION:

Purchasing Power Parity (PPP): Does PPP Eliminate Concerns about Long-Term Exchange Rate Risk?

POINT: Yes. Studies have shown that exchange rate movements are related to inflation differentials in the long run. Based on PPP, the currency of a high-inflation country will depreciate against the dollar. A subsidiary in that country should generate inflated revenue from the inflation, which will help offset the adverse exchange effects when its earnings are remitted to the parent. If a firm is focused on long-term performance, the deviations from PPP will offset over time. That is, in some years the exchange rate effects may exceed the inflation effects, whereas in other years the inflation effects will exceed the exchange rate effects.

COUNTER-POINT: No. Even if the relationship between inflation and exchange rate effects is consistent, this does not guarantee that the effects on the firm will be offsetting. A subsidiary in a high-inflation country will not necessarily be able to adjust its price level to keep up with the increased costs of doing business there. The effects will vary with each MNCs situation. Even if the subsidiary can raise its prices to match the rising costs, short-term deviations from PPP may occur. The investors who invest in an MNCs stock may be concerned about short-term deviations from PPP, because they will not necessarily hold the stock for the long term. Thus, investors may prefer that firms manage their operations in a manner that reduces the volatility in their performance in short-run and long-run periods.

WHO IS CORRECT? Use the Internet to locate two or more sources regarding this issue. Which argument do you support? Offer your own opinion on this issue and support your statement with APA citations and references to the sources you located.

Post a detailed and robust summary of your findings and use multiple sources (via APA references and citations) to support your position. Remember to also post meaningful and detailed responses to at least two posts from your classmates

Click the title Week 2 Finance Discussion Forum above and click "Create Thread" to reply to each question in your initial post. I may also add more questions throughout the week to cover more material. Be prepared to respond to these questions as well.

Expectations:

Your first weekly post should be made no later than Wednesday of the week. It should be intuitive, thoughtful, and properly documented with supporting references using proper APA style (in-text citations AND a reference list). Your minimum of two additional posts to classmates should be done on separate days between Thursday and Sunday. These responses to other posts should also be well-written, thorough, and professional. The week closes on Sunday at 11:59 PM and you will no longer have access to the discussion.

EACH POST FOR THE DISCUSSION SHOULD BE AT LEAST 1 PARAGRAPH IN LENGTH (150 words). Quantity is IMPORTANT BUT QUALITY is just as important. Say something deep & intuitive, don't just rephrase something you read or another student's posting. Also remember the MINIMUM number of substantial posts each week is 3, but a MINIMUM effort will not earn a 100%. You need to go a bit beyond minimum for that. Support your writing with proper APA style documentation -- ALWAYS.

Discussion Grading Criteria:

(40) Thoroughly answered all questions (10) Original post by Wednesday (20) Quality of responses to at least two classmates (more is better!) (10) References to text and/or other sources (10) Spelling & grammar at college level (10) Posted on separate days

TOTAL: 100 points