International Financial Management Essay

1625 words - 7 pages

I. Introduction
This research shall devise The Cola Index to assess whether currencies of different countries are currently trading at reasonable levels implied by the Law of one price and theory of Purchasing-Power-Parity (PPP).
II. Construction of the Index
To construct the index, selling prices of a 330ml Coca-Cola bottle in 25 different countries and regions were obtained in the same day together with their exchange rates against the US Dollar. The rationale of choosing a bottle of Coca-Cola in developing the index was that the product quality is identical in and every market under the consistent manufacturing process and prestigious brand image of Coca-Cola Corporation. Besides, ...view middle of the document...

76 | -37% |
Japan | Yen ¥ | 133.83 | 1.31 | 84.70 | 102.26 | -17% |
Malaysia | MYR | 2.51 | 0.76 | 1.59 | 3.30 | -52% |
Mexico | Peso $ | 10.32 | 0.78 | 6.53 | 13.25 | -51% |
New Zealand | NZ$ | 2.82 | 2.36 | 1.78 | 1.19 | 49% |
Norway | Kroner | 24.50 | 4.02 | 15.51 | 6.10 | 154% |
Philippines | Peso ₱ | 22.65 | 0.51 | 14.34 | 44.58 | -68% |
Poland | Zloty | 3.57 | 1.18 | 2.26 | 3.03 | -25% |
Russia | Ruble | 43.49 | 1.22 | 27.53 | 35.76 | -23% |
Singapore | S$ | 1.55 | 1.23 | 0.98 | 1.26 | -22% |
South Korea | Won ₩ | 1450.99 | 1.37 | 918.35 | 1,060.03 | -13% |
Sweden | SEK | 16.12 | 2.50 | 10.20 | 6.46 | 58% |
Switzeland | CHF | 3.91 | 4.39 | 2.47 | 0.89 | 178% |
Thailand | Baht ฿ | 18.28 | 0.57 | 11.57 | 32.32 | -64% |
Turkey | Lire | 2.27 | 1.04 | 1.44 | 2.19 | -34% |
UAE | Dirhams | 1.62 | 0.44 | 1.03 | 3.67 | -72% |
Vietnam | VND | 11217.22 | 0.53 | 7,099.51 | 21,088.10 | -66% |
*At current exchange rates |
**Weighted average prices of Ireland, Spain, Portugal, Germany, Belgium, Netherland, France and Italy |
†: Dollars per pound |
‡: Dollars per euroAll actual exchange rates were retrieved from Foreign currency website: http://www.xe.com/ on14th February 2014Selling prices of a 330ml Coca-Cola bottle were retrieved from Numbeo website: http://www.numbeo.com/cost-of-living/ on 14th February 2014 |
III. Analysis and discussion
The above summary table shows that European topped the Index, with Switzerland, Norway, Denmark and Sweden being among the top five most overvalued currencies while China and some South East Asia countries including Vietnam, Philippines and Thailand were reported to have cheapest Coca-Cola prices which means their currencies are considered undervalued against the U.S Dollar.
It is worth noticing that those countries with most undervaluation currencies tend to have large manufacturing export in either industrial or agricultural side. Recent academic studies have proved that some currencies are being kept at a relatively undervalued level against the U.S Dollar by their Government for the purpose of fostering economic growth (Frankel & Romer, 1999). Freund and Pierola (2008) found documented the positive relationship between a surge in manufactured exports exchange rate undervaluation thus fostering the national economic growth. The rationale is if currency is undervalued, the exports will be cheaper and they will grow leading to greater employment and facilitating export industries. Other study by Rodrik (2008) agreed that undervalued currency will make imports expensive and divert consumers to domestic goods and thus employment in domestic industries will increase. The most prominent example of the deliberate undervaluation issue is the Chinese-EU-US controversy about the Yuan currency. Critics have long accused China of keeping its currency artificially low in order to boost exports that give them an unfair edge to their export to grow so much faster than other major...

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