The Beginning-Of-The-Year Prices for a Pair of Boots Are $50

question 80

Essay

The beginning-of-the-year prices for a pair of boots are $50 in the United States and ¥8,000 in Japan.We know that prices in the United States and Japan will change over the coming year due to inflation.If we assume that inflation in the United States (our home country,inf_h)will be 3% and inflation in Japan will be 2% (our foreign country,inf_f),what will the price of the boots be at the end of the year? If one U.S.dollar can be exchanged for 160 Japanese yen today and purchasing power parity holds,what can we say about the future exchange rate one year from now?

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Definitions:

Strike Price

The price at which the holder of an option can buy (in a call option) or sell (in a put option) the underlying security.

Intrinsic Value

The actual value of a company or an asset based on underlying perception of its true value including all aspects of the business.

November 45 Call

A call option that gives the holder the right to buy a particular stock at a price of $45 per share, expiring in November.

Pure Discount Bond

A type of bond that is issued at a discount to its nominal value and pays no interest, but is redeemed at its face value at maturity.