Following are the Consumer Price Index inflation rates each year for the United States and Japan Also shown is the spot exchange rate for the beginning of each year A Using PPP (equation 19 3), compute what the 1 year forward exchange rate should be each year B Compare the forward rates computed in...

Spreadsheet Predicted Exchange Rate Difference with real 1990 1 ...

Following are the Consumer Price Index inflation rates each year for the United States and Japan. Also

Question:

Following are the Consumer Price Index inflation rates each year for the United States and Japan. Also shown is the spot for the beginning of each year.

A. Using PPP (equation 19.3), compute what the 1-year forward exchange rate should be each year.
B. Compare the forward rates computed in part (a) to the actual exchange rate at the beginning of the next year. How well does PPP predict the future exchange rate? Is it biased too high, too low, or about right?

Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...