FINC420 Case Study: Big Mac Index & Currency Valuation Analysis

This case study utilizes the Big Mac Index to analyze the valuation of the Malaysian Ringgit, South African Rand, and Uruguayan Rupee against the US dollar. It examines whether these currencies are overvalued or undervalued compared to their Purchasing Power Parity (PPP) values from 2017 to 2020. The analysis explains the factors influencing currency appreciation or depreciation, such as trade wars, domestic inflation, and economic stability. The study determines whether the exchange rates are moving towards parity as predicted by PPP theory, citing reasons like the China-US trade war affecting the South African Rand, oil price fluctuations and domestic inflation impacting the Malaysian Ringgit, and Uruguay's economic stability contributing to its currency's overvaluation. The case study references academic sources to support its findings.

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Name:
Course
Professor’s name
University name
City, State
Date of submission

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1. Use the BigMac Index for these 3 currencies to state if they overvalued or
undervalued compared to their PPP value during the same period on January of
every year and explain if the FX rate is moving towards its parity value as
predicted by the PPP theory.
Using the Big Mac the three currencies are either massively undervalued or overvalued
compared to the PPP in the same period. Overvaluation and undervaluation with respect to
PPP is the cost that equalizes a basket of goods in the market between two countries. In this
case, it is the US, Malaysia, South Africa and Uruguay. This represents the PPP value of the
US dollar with respect to the Malaysian Ringette, the South African Rand and the Uruguayan
Rupee.
Big Mac
Price
Exchange Rate
2017
2018 2019 2020
United states ( Dollar)
MYR/USD
4.175 - - -
Malaysian Ringgit 4.3244 3.9080 4.143
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South Africa ( Rand)
ZAR/USD
13.224 11.849. 14.23
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Uruguay UYU/USD
`
28.083 28.299 28.23
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MYR/USD
The Indian rupee is massively undervalued in comparison to the USD. Since 2016, the

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average undervaluation for the Malaysia currency is 53.2% and this has been attributed by a
number of reasons. Some of the reasons for the massive undervaluation include the oil pain,
the rise in domestic inflation and the rise or a strong U.S economy under the trumps
administration (Contractor, 2019). Malaysian economy is over-reliant on the oil where Iran
has been pushing the oil prices upwards and this affects the Indian economy and has put a lot
of pressure on the Malaysian ringgit. The FX rate is moving towards its parity.
ZAR/USD
The South African Rand is also another currency that has been massively undervalued since
2016. However, the reasons for its undervaluation vary from what is going on in India. For
the ZAR, it has been undervalued due to the fact that there is a trade war between China and
the U.S. This has led to investors wanting to invest more in safer countries and keep away
from the currencies in emerging markets like the ZAR. Low investment rates has led to a
decrease in the demand for the South African Rand which has led to a depreciation in the
currency (Grossmann, Ngo, and Simpson, 2017). The FX rate is moving towards its parity.
UYU/USD
For the Uruguayan currency, it has been overvalued. The reason for its overvaluation is its
strong economic base over the last few years. While some countries in South America have
seen major political, economic and social uprising, Uruguay has remained relatively calm and
seen a lot of stability for its currency. The investors have continued to invest and its economy
has not been affected by trade wars. The FX rate is not moving towards its parity (Morvillier,
2020).

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2. Reasons for an appreciation or depreciation against the USD.
For the ZAR, it has been undervalued due to the fact that there is a trade war between China
and the U.S. This has led to investors wanting to invest more in safer countries and keep
away from the currencies in emerging markets like the ZAR. The Malaysian Ringgits is
massively undervalued in comparison to the USD. Since 2016, the average undervaluation.
Some of the reasons for the massive undervaluation include the oil pain, the rise in domestic
inflation and the rise or a strong U.S economy under the trumps administration (Ramanayake,
and Lee, 2017). For the Uruguayan currency, it has been overvalued. The reason for its
overvaluation is its strong economic base over the last few years.

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References
Contractor, F.J., 2019. What Do We Mean by Undervalued or Overvalued
Currencies?. Rutgers Business Review, 4(1).
Grossmann, A., Ngo, T. and Simpson, M.W., 2017. The asymmetric impact of currency
purchasing power imparities on ADR mispricing. Journal of Multinational Financial
Management, 42, pp.74-94.
Morvillier, F., 2020. Do currency undervaluations affect the impact of inflation on
growth?. Economic Modelling, 84, pp.275-292.
Ramanayake, S.S. and Lee, K., 2017. Differential Effects of Currency Undervaluation on
Economic Growth in Mineral-Vs. Manufacture-Exporting Countries. Innovation Policy,
Systems and Management, pp.345-368.