Assume the spot rate is $1.30/GBP. How will this rate adjust according to PPP, if we...
Assume the spot rate is $1.30/GBP. How will this rate adjust according to PPP, if we assume UK has an inflation of 3% and US has an inflation of 3.5%?
Homework Answers
Fwd rate = SPot Rate (1+Hi ) / (1+Fi )
Hi = Inflation Rate in US
Fi = Inflation rate in UK
Fwd rate = SPot Rate (1+Hi ) / (1+Fi )
= $ 1.30 * ( 1 + 0.03 ) / ( 1+0.035)
= 1.30 * 1.03 / 1.035
= 1.29
Fwd rate 1 GBP = USD 1.29
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