Omni Advisors, an international pension fund manager, uses the concepts of purchasing power parity (PPP) and the
Question:
Base price level ................. 100
Current U.S. price level .............. 105
Current South African price level .......... 111
Base rand spot exchange rate ............. $0.175
Current rand spot exchange rate ............ $0.158
Expected annual U.S. inflation ........... 7%
Expected annual South African inflation ....... 5%
Expected U.S. one-year interest rate ......... 10%
Expected South African one-year interest rate ...... 8%
Calculate the following exchange rates (ZAR and USD refer to the South African rand and U.S. dollar, respectively):
a. The current ZAR spot rate in USD that would have been forecast by PPP.
b. Using the IFE, the expected ZAR spot rate in USD one year from now.
c. Using PPP, the expected ZAR spot rate in USD four years from now.
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... Fisher Effect
The Fisher Effect is an economic theory created by economist Irving Fisher that describes the relationship between inflation and both real and nominal interest rates. The Fisher Effect states that the real interest rate equals the nominal interest...
Fantastic news! We've Found the answer you've been seeking!
Step by Step Answer:
Related Book For
International Financial Management
ISBN: 978-0078034657
6th Edition
Authors: Cheol S. Eun, Bruce G.Resnick
Question Posted: