For the first part, you will need to read carefully the insert “Finance matters, McPricing.” Then you will have to use the Excel data that I provided and compute the same thing that “The Economist” computed. Each of you will have to compute for one time period only as detailed in the table below. After computing for all the countries for which you have data you will need to indicate where you would and where you would not buy a hamburger.
The second part of the project involves a demonstration of the prediction power of the interest rate parity. Each of you will be assigned a country for which you will have data on exchange rate and on two interest rate measures. Those of you having an “*” after the country, will have to compute with the money market rates and, the rest will have to compute with the short term rates. You will need to compute for all the years available the predicted exchange rate based on interest rate parity and compare it with the actual exchange rate (make sure that you do the comparison for the correct period.)
The computations above will be presented in a report of MBA quality that will review shortly the theories employed in the two parts, the results and your conclusions.
These solutions may offer step-by-step problem-solving explanations or good writing examples that include modern styles of formatting and construction of bibliographies out of text citations and references. Students may use these solutions for personal skill-building and practice. Unethical use is strictly forbidden.Executive summary
As per the law of one price, the price of a commodity should be the same across all economies so that equality and fairness can be established. Accordingly, the purchasing power parity theory was applied to determine the price of a burger of McDonald’s in different economies since they sell standardized burgers all across the world. It was expected that the dollar equivalent price of the burgers would be the same, but the same was not seen to be true. After determining the exchange rate with respect to the US dollar and comparing it with the prevalent exchange rate, it was seen that there was significant disparity. This disparity shows that the law of one price does not hold good and there are imperfections due to which the law of one price cannot be implemented completely. As an example, the transaction costs are assumed to be zero under the law of one price, but this is not the case and so the differences occur. On the basis of the calculations, it was seen...
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