Question

Suppose the spot exchange rate for the Hunganan forint is HUF 219 merest rales iri the Unted states are 4 3 peroent pec year, hey are 6 2 percent in Hurgary Use bhe approximale interest rate parity equaticn to ansiwer this quesion wnat do you predict the exchange rate wil be in one year? In two years? in five years? ibo not incluce the Hungainan tonnt sign (HUF Do not round ncermediate calculations and round your answers to 2 decimal places,e.9.32.16, Exchango rate HUF HUF Two years Five years

Answer 1

Interest Rate Parity formula:

Terms in the formula is as follows,

= Foreign currency

$i_{f}$ = Interest rate of foreign currency

$i_{d}$ = Interest rate of domestic(home) currency and

= Domestic (home) currency.

1$ = HUF 219

1 year exchange rate

1$ (1+0.043) = HUF (1+0.062)

1$ = HUF 222.9895

1$ = HUF 222.99 (rounded off).

2 Year exchange rate

1$ (1+0.043)² = HUF (1+0.062)²

1$ = HUF 227.05 (rounded off)

5 Year exchange rate

1$ (1+0.043)⁵ = HUF (1+0.062)⁵

1$ (1.2343) = HUF (1.3509)

1$ = HUF 239.69 (rounded off).

Year	HUF Exchange rate
One Year	222.99
Two Year	227.05
Five Year	239.69