The iPod (nano 2 gigabytes) costs 608 Brazilian reals (BRL) in Brazil and $149.00 in the US. The actual market exchange rate between the Brazilian real and the U.S. dollar is 0.4 US$ per BRL.
a) What is the dollar cost (in US$) of the iPod sold in Brazil?
b) What is the exchange rate ($/real) implied by the iPod Purchasing Power Parity?
c) Comparing the actual market exchange rate to the one implied by the iPod PPP, determine whether the BRL is over/under valued and by how much in percentage terms?
d) What is the profitable trading strategy, that is, which currency would you go long (buy) and which short (sell)?