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3.Assume that ‘SURFS’ company imports wind surfs from United States to Turkey. The current price of...

3.Assume that ‘SURFS’ company imports wind surfs from United States to Turkey. The current price of a wind surf in United States is 2000 USD. The price of the same wind surf is 9500 TL in Turkey.

a) If Purchasing Power Parity holds, what is the spot exchange rate between Turkish Lira and United States Dollars (TL / USD)?

b) If Turkish lira depreciates by 20% against USD, what is the new TL/USD exchange rate?

c) Surfs Company increases the price of a wind surf to 11200 TL after the 20% depreciation of TL.
i)Calculate the degree of pass-through

ii) Is there a partial or complete pass through?
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Answer #1

(a) Computation of Spot Exchange rate using the purchase power perity theory:-

Spot Rate (TL/USD) = Price of comodity in turkey(TL) / Price of comodity in usa(USD)

= 9500 / 2000

Spot Rate (TL/USD) = 4.75

(b) Spot Rate when Turkish lira is in depreciated by 20%

Current price of USD = 2000

Current Price of Turkish lira is = 120% od 9500 = 11400

Spot Price (TL / USD = Price of comodity in turkey(TL) / Price of comodity in usa(USD)

= 11400 / 2000

Spot Rate (TL/USD) = 5.7

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