International Financial Management

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, the product is domestically manufactured using local materials and input costs by local bottling firms within Coca-Cola’s worldwide network. This means that the selling price in each country market is independent with the exchange rate as the product possesses substantial elements of domestic costs and prices to provide an effective measure of relative purchasing power. Details of the Cola Index are described in the below table:
The ColaCurrency Menu - the CocaCola Standard |
Countries | 330ml Bottle of Coca Cola prices | Implied PPP of the Dollar | Actual Exchange Rate | Under (-)/Over(+) Valuation against Dollar |
| In Local Currency | In Dollars* | | | |
United States | $ | 1.58 | 1.58 | - | - | - |
Australia | A$ | 2.83 | 2.55 | 1.79 | 1.11 | 61% |
Brasil | R$ | 3.01 | 1.28 | 1.91 | 2.36 | -19% |
Britain | £ | 0.76 | 1.27 | 2.08† | 1.67† | -24% |
Canada | CAD$ | 1.84 | 1.67 | 1.16 | 1.10 | 5% |
China | Yuan | 4.21 | 0.69 | 2.66 | 6.08 | -56% |
Czech Republic | Koruna | 28.26 | 1.42 | 17.89 | 19.92 | -10% |
Denmark | Danish krone | 21.25 | 3.92 | 13.45 | 5.43 | 148% |
EU** | € | 1.83 | 2.51 | 0.87‡ | 1.38‡ | 37% |
HongKong | HK$ | 7.72 | 1.00 | 4.89 | 7.76 | -37% |
Japan | Yen ¥ | 133.83 | 1.31 | 84.70 | 102.26 | -17% |
Malaysia | MYR | 2.51...