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5. Purchasing power parity The law of one price The theory of purchasing power parity (PPP) states that in the long-run exchange rates between two countries adjusts so that the price of an identical good is the same when exxpressed in the same currency. A gaming console sells for $175.23 in the United States. The exchange rate between the U.S. dollar and the Swiss franc (SFr) is $0.8223 per Swiss franc. Assuming that PPP holds true, how much does the same gaming console cost in Switzerland? OSFT 213.10 SFr 245.06 OSFr 234.41 SFr 181.14 Suppose the price of the gaming console in Switzerland was actually SFr 170.48. Assuming no transaction costs, transportation costs, or import restrictions, PpP predicts that the demand would in Switzerland Relative inflation rates affect interest rates, exchange rates, the overall economic health of a country, and the operations and profitability of multinational companies. Consider the following statement: If a company borrows from a country with low interest rates, and the currency of the lending country appreciates, it becomes more expensive for the borrowing company to repay the initial loan. Based on your understanding of the relationship between relative inflation rates and exchange rates, identify whether the preceding statement is valid or invalid. @The statement is invalid, because as the currency of the lending country appreciates, it becomes cheaper to repay the initial loan and thus increase savings. The statement is valid, because as the currency of the lending country appreciates, it becomes more expensive for the borrowing company to repay the initial loan. If companies borrow from countries with low interest rates, the potential gains from the interest savings wil likely be by the losses from currency appreciation. The currency of a country with a higher inflation rate than the U.S. inflation rate will over time against the dollar. Sebrele Enterprises Inc. is a U.S. firm evaluating a project in Australia. You have the following information about the project The project requires an investment of AU$800,000 today and is expected to generate cash flows of AU$1,300,000 at the end of each of the next two years. Australian dollar (AUS). The current exchange rate of the U.S. dollar against the Australian dollar is $0.7811 per The one-year forward exchange rate is $0.8096/ AUS, and the two-year forward exchange rate is $0.8344/ AUS. The firm's weighted average cost of capital (WACC) is 8.5% , and the project is of average risk What is the dollar-denominated net present value (NPV) of this project? O$1,519,883 $1,583,211 e$1.393,226 $1,266,569 There are three major types of international credit markets. Read the following statement and then indicate which type of international credit market is being described. Nitreca Chemicals Inc. took a 10-year floating rate bank loan with an interest rate tied to LIBOR to finance a multinational project. eForeign bond O Eurobond eEurocredit

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