Final answer:
OMI Advisors uses purchasing power parity (PPP) to compare the buying power between different currencies and make investment decisions that account for price discrepancies of goods across countries, ensuring that their investments maintain or increase in value in real terms.
Step-by-step explanation:
OMI Advisors, an international pension fund manager, utilizes purchasing power parity (PPP) to assess and compare the value of their investments across different countries. PPP is a concept that allows for the comparison of the buying power between different currencies relative to a basket of goods. By using PPP, OMI Advisors can gauge the true economic efficiency and potential returns on investments in different countries. It accounts for the varied costs of the same goods in different places and uses "international dollars" to express these values uniformly, thus enabling the advisor to make better-informed investment decisions.
The idea is simple yet profound: over time, the exchange rates between currencies are expected to adjust so that identical goods have approximately the same price across nations, in terms of each currency's buying power. This concept is particularly important for OMI Advisors when considering long-term investments, as businesses could otherwise exploit price differences of internationally traded goods like oil, steel, computers, and cars, leading to fluctuating and potentially unsustainable profit margins.
Therefore, by applying the PPP model, OMI Advisors can align its strategies with a more balance and realistic global perspective, ensuring that their pension funds maintain or increase their value in real terms, and protecting against inflation and exchange rate volatility.