Question

Pulau Penang Island Resort. Theresa Nunn is planning a 30-day vacation on Pulau Penang, Malaysia, one year from now. The presentcharge for a luxury suite plus meals in Malaysian ringgit (RM) is RM1,045/day. The Malaysian ringgitpresently trades at RM3.1350/$. She figures out the dollar cost today for a 30-day stay would be$10,000. The hotel informed her that any increase in its room charges will be limited to any increase inthe Malaysian cost of living. Malaysian inflation is expected to be 2.75% per annum, while U.S. inflationis expected to be only 1.25%.
a. How many dollars might Theresa expect to need one year hence to pay for her​ 30-day vacation?
b. By what percent will the dollar cost have gone​ up? Why?

Answer 1

Answer:

A) $10124.83

B) 1.0125%

Explanation:

1) We are told that the present charge for a luxury suite is RM 1,045/day.

This means that the charge after one year will also include inflation charge.

Thus;

Charge after 1 year = 1045 × (1 + 2.75%)

= 1045 × 1.0275 = RM 1,073.7375 per day

For 30 days, charge is;

1073.7375 × 30 = RM 32212.125

Spot exchange rate in 1 year = spot rate × (1 + RM inflation rate)/(1 + US inflation rate)

Spot exchange rate in 1 year = 3.135 × (1 + 2.75%)/(1 + 1.25%) = 3.135 × 1.0275/1.0125 = 3.1815

Cost needed one year to pay for 30 day vacation = 32212.125/3.1815 = $10124.83

B) percent by which the dollar cost will have gone​ up = (10124.83/10000) × 100% = 1.0125%