Suppose that the following conditions all hold: uncovered and covered interest rate parity, real interest rate parity, relative and absolute purchasing power parity. And suppose you have the following information:

- The current nominal interest rate for a 1 year deposit in a Brazilian bank is 20%.

- Inflation is expected to be 10 percentage points higher in Brazil than Argentina over the next year.

- The forward exchange rate between Brazil and Argentina is 1.1 (Brazilian real / Argentinian peso).

Compute the current spot exchange rate (Brazilian real / Argentinian peso) using the information above, or state if there is not enough information given above to do this.

Answer rating: 100% (QA)

Interest Rate Parity Interest rate parity holds that holding your domestic currency and investing it ... View the full answer