Solutions: FINA 5500 / Spring 2012 / Quiz 5
Current price of a barrel of crude oil (BCL) in the US: $105
Current price of BCL in Mexico: MXN 1,480
Current exchange rate: 1 USD = MXN 12.70
Please apply the BigMac type analysis to determine the following:
a) The price of BCL in Mexico in terms of US dollars (based on the going exchange rate)
1480 / 12.70 = $116.54
b) What should the exchange rate be for the Mexican pesos so that the price of BCL is the same in both
countries?
1480 / 105 = MXN 14.095 = I USD
c) Based on the current price of BCL in both countries, what is the percentage overvaluation or
undervaluation of the Mexican peso against the USD?
(14.095 – 12.70) / 12.70 = 10.986% overvaluation of MXN against the USD
d) Suppose the price of BCL increased by 17% in the US and 11% in Mexico. At the end of the year the
exchange rate is MXN 12.25 per USD. Which currency appreciated in “real terms” USD or MXN?
According to PPP, the expected percentage change in the DQ for MXN = (1.17 / 1.11) – 1 = 5.41%
The actual percentage change in the DQ for MXN = (12.7 – 12.25) / 12.25 = 3.67%
So in “real terms” MXN depreciated & USD appreciated