Question

All interest and inflation rates are stated as annual rates.

Purchasing power parity

1. If the spot market exchange rate for the British pound is 1.3158, the expected inflation rate for the UK is 2.10%, and the expected inflation rate for the US for the next year is 1.90%, what is the expected exchange rate for the British pound in one year?

2. If the spot market exchange rate for the Philippine peso is 52.55, the expected inflation rate for the Philippines is 5.1 %, and the expected inflation rate for the US is 1.90%, what is the expected exchange rate for the Philippine peso in six months?

3. If the spot market exchange rate for the Swiss franc is 0.9919, the expected inflation rate for Switzerland is 0.70%, and the expected inflation rates for the US is 1.90% what is the expected exchange rate for the Swiss franc in two years?

Answer 1

Spot rate 1 POUND 1.3158 US 1.90% year 2.10% Inflation rate Period Expected exchangr rate 1 Pound 1.3132 10 2) Spot rate 1 PP 52.55 12 13 14 15 16 17 18 3) 19 20 21 US 1.90% year Inflation rate 5.10% 0.5 Period Expected exchangr rate 1 PP Spot rate = 51.7438 1 SF 0.9919 Inflation rate Period US 1.90% year 0.70% 23 24 25 Expected exchangr rate ISF- 1.0157