Top 11 Purchase Parity Based On Law Of One Price Questions You Need To Solve

Type 1 : Based on Law of One Price

Q.1) A television in US is costing $ 500. The same television is costing € 725 in Germany. What is the spot rate between euro and dollar?

(Ans.: $1 = 1.45 Euros i.e. USD EUR 1.4500)

Q.2) If a dollar direct quote in Mexico is $1 = 7.8 Pesos and a CD cost $15.00 in U.S. What is the price of CD in Mexico?

(Ans.: 117 Pesos)

Q.3) If a chair costs 500 Euros in Germany and the same chair costs 70,000 Japanese Yen in Japan, what is the Spot Rate between Yen and Euro?

(Ans.: EUR JPY 140 Or inverting 100 JPY EUR 0.7143)

Type : 2 Based on inflation Comparison

Q.4) The inflation in India is 9% and that in USA is 4%. If the spot rate is  39.00/$ what would be the spot rate after one year?

(Ans.:  40.8750 / $)

Q.5) An Indian company is planning to invest in the US. The rates of inflation are 8% in India and 3% in USA. What is the spot rate can you expect after 2 years? Spot rate now is  45.00/$.

(Ans.:  49.4750 / $)

Q.6) GBP USD 1.50 spot. GBP USD 1.52 (for 6 months).

Inflation in USA is 6.72% per annum.

What would be the inflation in Britain?

(Ans.: Inflation in Britain is 4% per annum)

Q.7) Ducati bike costs Rupees 10 Lakh in India. Its price in USA is $ 21,000, in Europe it is € 16,000 and in Britain it is £ 12,500. What is the spot rate of $, € and £ in Rupee terms as per the law of one price?

What might be spot rate GBP USD?

(Ans.: USD INR 47.6191, EUR INR 62.50 and GBP INR 80.00, GBP USD 1.68)

Q.8) A dozen of apples cost Rupees 456 today, which is expected to rise to Rupees 504 after 1 year. The same dozen of apples cost 12 swiss francs today and they are expecting price of 12.60 swiss francs after one year.

(a)    As per law of one price and PPP, what is CHF INR spot rate?

(b)   As per law of one price and PPP, what is CHF INR 1-year forward rate?

(c)    Which currency is appreciating? CHF or INR?

(d)   Calculate % forward margin on appreciating currency.

(Ans.: CHF INR 38, CHF INR 40, CHF is appreciating, 5.26%)

Q.9) An exchange forecaster expects the dollar to trade at 125 yen, one year from now. If the spot is Yen 121/$ and US inflation rate is 2%, what is the expected inflation rate in Japan?

(Ans.: 5.37%)

Q.10) You are given the following information:

Spot rate: Rupees 44.0000 = $1

Inflation rates: US – 3%, India – 9%

(a)    Calculate 3 month forward USD INR rate.

(b)   If 3 month forward rate: Kenyan Schilling 80 = $1

Calculate the 3 month INR KES forward rate.

(Ans.: USD INR 44.6551 and INR KES 1.7915)

Q.11) The Sterling is trading at $1.6100 today. Inflation in UK is 4% and that in USA is 3%. What could be the spot rate ($/£) after 2 years?

(Ans.: 1.5792)