Question

An American family wants to buy a new SUV and they have decided it has to be either Lexus GX made in Japan or Mercedes-Benz GLS made in Germany. The Lexus is currently priced at ¥5.9 million and the Mercedes-Benz at €50,000. Assume that the dollar prices of these cars are calculated at the market exchange rate. At these prices, the family is indifferent between the two cars. Given the COVID-19 situation, they decide to postpone the purchase by a year. In the next 12 months, they expect the dollar to rise against the yen 1 percent and against the euro by 3 percent. They further expect that the prices of the two cars in their respective currencies will remain the same. Which car is expected to be a better deal a year from now?

1. Lexus GX.
2. Mercedes-Benz GLS.
3. Lexus GX if the yen depreciates against the euro.
4. Lexus GX if the yen does not depreciate against the euro.
5. The two cars will remain equally attractive if the yen does not depreciate against the euro.

Answer 1

When the dollar rises, it means its value is increasing against the other currencies.

The american family will buy the new SUV in USD.

Lexus is priced at ¥5.9 million. 1USD = 109 yen. Thus at the current market price the Lexus is priced at USD 54,128 (¥5.9 million / 109)

Now the mercedes benz is priced at €50,000. 1USD =€ 0.89. Thus at the current exchange rate the Mercedes is priced at USD 56,180.

They decide to postpone the purchase by a year, wherein they expect the USD to rise against the yen by 1%. Thus the dollar value is expected to rise, meaning the yen value is expected to fall by 1%. Thus 1USD = 110 yen (109*1.01). The car price in USD will be USD 53,636.

Now the USD value will rise by 3%, meaning the Euro value will fall. Thus 1USD = 0.9167 (0.89*1.03). Thus the car will be priced at USD 54,544.

Thus the Lexus is an attractive deal as it costs less than the mercedes. a is the answer.