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(solution) AvtoVAZ OAO, a leading auto manufacturer in Russia, was launching


AvtoVAZ OAO, a leading auto manufacturer in Russia, was launching a new automobile model in 2001, and is in the midst of completing a complete pricing analysis of the car for sales in Russia and export. The new car, the Kalina, would be initially priced at Rubles 260,000 in Russia and sell in U.S. dollars at the current spot rate they intend to raise the price domestically with the rate of Russian inflation over time, but is worried about how that compares to the export price given U.S. dollar inflation and the future exchange rate. Use the following data table to answer the pricing analysis questions.
Calendar year 2001 2002 2003 2004 2005 2006
Kalina Price (rubles)            260,000
Russian inflation (forecast) 14.00% 14.50% 11.00% 8.00% 8.00%
U.S. inflation (forecast) 2.50% 2.95% 3.00% 3.00% 3.00%
Exchange rate (rubles = USD 1.00)                30.25
Given the current spot rate, what would be the price of the car in the US market in 2003 assuming PPP holds?


I have calculated current price as $8,595.04, but I do not understand which Ruble and/or USD amount to start year one and two with. Do I use the current spot rate or do I use the new rate I calculated after inflation.

 


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