Finance Problem Set 30 1-1

1. Natalie Imbruglia’s music CD, Counting Down the Days, sells for Aus$25 in Australia, US$19 in the US, and £9 in the UK.  The current exchange rates are 2.45 Aus$/£ between the Australian dollar and the UK pound, and 1.90 US$/£ between the US dollar and the pound. 

A. Calculate and list the price of the CD in terms of UK pounds in all three countries. 

B. Based on the CD price only and using your answer above, is the British pound overvalued or undervalued with respect to the Australian dollar in terms of PPP?  Explain briefly.

C. If the CD prices reflected the overall price levels, would the purchasing power parity theory predict a British pound appreciation or depreciation with respect to the US dollar?  Explain briefly.

International Finance Theory and Policy - Chapter 30: Last Updated on 5 /01/08