Question

Suppose that you planning a 30-day vacation in Thailand, one year from now. The present charge...

Suppose that you planning a 30-day vacation in Thailand, one year from now. The present charge for a hotel room plus meals cost in Thai baht (THB) is THB 10,500/day. The Thai baht presently trades at THB 31.6572/$. The hotel informed you that any increase in its room charges will be limited to any increase in the Thai cost of living. Thailand inflation is expected to be 0.95% per annum, while U.S. inflation is expected to be 2.25%.

  1. What is the THB cost for your vacation today and one year later?
  2. What is the expected spot rate one year from now based on PPP (THB/$)?
  3. How many dollars might you expect to need one year from now to pay for your 30-day vacation?
  4. By what percent has the dollar cost gone up? Why?
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Answer #1
1) THB cost for 30 day vacation as of today = 10500*30 = 315000.00 THB
THB cost 1 year later = 315000*1.0095 = 317992.50 THB
2) Spot rate 1 year form now based on PPP = 31.6572*1.0095/1.0225 = 31.2547 THB/$
3) Dollars needed 1 year from now = 317992.50/31.2547 = $     10,174.23
4) Dollar cost of the vacation today = 315000/31.6572 = $        9,950.34
Dollar cost has gone up by 10174.23/9950.34-1 = 2.25%
Dollar cost has gone up due to inflation in US.
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