Discussion:
Suppose Canadian wheat sells for $100 per bushel and Russian wheat sells for 1600 rubles per bushel.
a. If you believe that the purchasing-power parity theory holds, and if the current exchange rate is 12 rubles per dollar, would you expect the exchange rate to change? In what direction would it change?
b. If the current exchange rate is 12 rubles per dollar, how much is the real exchange rate, based on the prices of wheat?
c. If the exchange rate is 12, how could you make profit in this situation? How much profit per bushel could you make?