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Exchange Rate
Spot Rate
Forward Rate
Direct and Indirect
Quote
Arbitrage
Purchasing Power
Inflation
Perfect or Efficient
markets
Example
Price of wheat in France (per bushel): P
Price of wheat in U.S. (per bushel): P $
P = S/$ P$
Example:
Price of wheat in France per bushel (p) = 3.45
Price of wheat in U.S. per bushel (p$) = $4.15
S/$ = 0.8313 (s$/ = 1.2028)
Countries
The
The
Absolute PPP
Law of one price extended to
a basket of goods
If
Have a look
If the price of the basket in the U.S. rises relative
to the price in Euros, over a period of three days
May 21 : s/$ = P / PUS
= 1235.75 / $1482.07 = 0.8338 /$
May 24:s/$ = 1235.75 / $1485.01 = 0.83215 /$
sa/b = Pa / Pb
Pa
Pb
sa/b
Statement
The absolute PPP postulates that the
equilibrium
exchange rate between currencies of two
countries
is equal to the ratio of the price levels in
the two
nations.
Thus, prices of similar products of two
countries should be equal when measured
in a common currency as per the absolute
version of PPP theory