Question

Chamonix Chateau Rentals. You are planning a ski vacation to Mt. Blanc in Chamonix, France, one year from now. You are negotiating the rental of a chateau. The chateau's owner wishes to preserve his real income against both inflation and exchange rate changes, and so the present weekly rent of 9,800 (Christmas season) will be adjusted upward or downward for any change in the French cost of living between now and then. You are basing your budgeting on purchasing power parity (PPP). French inflation is expected to average 3.5% for the coming year, while US. dollar inflation is expected to be-2596.The current spot rate is $1.3620 What should you budget as the U.S. dollar cost of the 1-week rental?

a. Spot exchange rate (S/) $1.3620

b. Expected US inflation for coming year | 2.500%

c. Expected French inflation for coming year | 3.500%

d. Current chateau nominal weekly rent (E) 9,800.00

Answer 1

The budgeted $ amount is $13,680.88

Step-by-step explanation:

The purchasing power parity formula gives us an idea what an exchange spot rate would be in future period using the below formula:

Future spot rate=current spot rate*(1+US inflation)/(1+French inflation)

current spot rate=$1.3620

US inflation rate is 2.50%

French inflation is 3.50%

Future spot rate=$1.3620*(1+2.5%)/(1+3.5%)

future spot rate=$1.3488

The weekly cost of vacation would also be adjusted for inflation rate in France as follows:

Adjusted price=9800*(1+3.5%)=10143

Hence the cost of the one week rental would be 10143 multiplied by the future spot exchange rate of 1.3488 i.e $ 13,680.88 (10143*1.3488)