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Footnotes 1 . We are limiting our analysis to firms whose value is associated exclusively with cash flows and ignoring the impact of exchange rate movements on the value of real options held by the firm. The impact of foreign currency exposure on option value is an area for further study. 2 . Market baskets are priced and PPP rates computed by the OECD every five years. These rates are, at best, approximations of absolute PPP. The most recent update was in 1990. Technically, a true absolute PPP rate for two countries can be calculated only if the consumption mix of goods and services in the two countries is identical, a requirement never satisfied in practice. So, while the market baskets in the OECD calculation presumably are identical, they would match the actual mix in both countries only by coincidence. Even so, the OECD numbers do give an indication of approximate parities, at least between countries with similar consumption patterns. Between repricing dates, the OECD numbers can be updated using changes in price indices. Each year, the Economist , only partly tongue‐in‐cheek, computes and publishes its “Big Mac Index,” a compilation of PPP rates between a number of
Journal of Applied Corporate Finance – Wiley
Published: Sep 1, 1993
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