Relative Purchasing Power Parity shows the relationship between exchange rates and inflation. The formula is E(St) = S0[1+(hFC-hCDN)]t where h refers to expected inflation in both the foreign country (FC) and Canada. The spot exchange rate between the Canadian dollar and the Thai Baht is CAD/THB = 23.3514. If inflation in Canada is expected to be 1.5% per year for the next three years and inflation in Thailand is expected to be 3% per year over the same time period, which of the following statements are true? Select one: a. You would expect the THB to depreciate against CAD b. The expected spot exchange rate in three years is CAD/THB = 24.4181 c. If you expect to need Baht in three years time and if you could buy a three-year forward contract at an exchange rate of CAD/THB = 24.0000, based on the data we have we should enter into the forward contract d. You would expect the THB to depreciate against CAD AND The expected spot exchange rate in three years is CAD/THB = 24.4181

Answer rating: 100% (QA)

To determine which statements are true lets first calculate the expected spot exchange rate in three ... View the full answer