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Hi, John!
In the question we were given rate as EUR / $. (for task b (ii) )
So I’ve took this rate and used in ‘So’ in PPP formula without conversion to ‘$ / EUR’.
Obviously, EUR remitted to Buryecs was incorrectly calculated by me.But what is the logic behind?
I thought If we have initial CF in dollars and remittance to base country in EUR, we can simply multiply our dollar CFs by rate ‘EUR / $’, OR divide by ‘$ / EUR’ rate. So it seemed to me that conversion from ‘EUR/$’ to ‘$/EUR’ is unnecessary step.Could you explain please why is it so and when we should convert the rate?
I understand that my logic is somewhere incorrect, but I still cannot understand where.Kind regards,
NickI am puzzled as to which answer you are looking at, because the examiners answer has not converted the exchange rate to $/€.
The spot rate is €/$ 0.1430. Using PPP, the rate in 1 years time is 0.1430 x 1.06/1,03 =
€/$ 0.1472.We are converting $’s to €’s, and so 600 at time 1 converts to 600 x 0.1472 = €88.32
Sorry, John, you are right.
I’ve just found the examiners answer in the internet.
It differs from the approach printed in by book (LSBF’s books).I’ve done 0.1430 x 1.03/1,06 = €/$ 0.1389, simply confusing numerator and denominator. However, in my book the answer is:
“Spot rate in $’s per € = 1/0.143 = 6.993 per €1
• Year 1 = 6.993 x 1.03/1.06 = 6.795”
So they used this $/€ rate further in calculation.And when I compared their “6.993 x 1.03/1.06” to my “0.1430 x 1.03/1,06”, it led me thinking that numerator and denominator are correct, and my mistake in not reversing current spot rate, omitting this step. And this confused me significantly… 🙂 In fact (as i understand now), it is unnecessary step.
I have no idea why LSBF state answers in other manner of examinator’s way.
It is not the first time their answer just confuses me.Nick
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