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Foundations Of Financial Management
Found in: Page 681
Foundations Of Financial Management

Foundations Of Financial Management

Book edition 16th
Author(s) Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen
Pages 768 pages
ISBN 9781259277160

Short Answer

From the base price level of 100 in 1979, Saudi Arabian and U.S. price levels in 2008 stood at 200 and 410, respectively. If the 1979 $/riyal exchange rate was $0.26/riyal, what should the exchange rate be in 2008? Suggestion: using purchasing power parity, adjust the exchange rate to compensate for inflation. That is, determine the relative rate of inflation between the United States and Saudi Arabia and multiply this times $/riyal of 0.26.

$0.533 per riyal

See the step by step solution

Step by Step Solution

Step 1: Purchasing power parity- definition

Purchasing power parity theory states that the equilibriumrate of exchange is determined by the equality of the purchasing power of two inconvertible currencies

Step 2: Calculation of relative rate of inflation

Step 3: Calculation of exchange rate in 2008

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