Using the theory of purchasing power parity and forecasts of expected inflation over the next year, forecast
Question:
Using the theory of purchasing power parity and forecasts of expected inflation over the next year, forecast the spot exchange rate for the above for one year in the future.
S2 = S1 ∙ 1+ Expected (Annual Foreign Inflation)1+ Expected (Annual US Inflation)
where S1 = Current spot rate expressed in European terms S2 = Spot rate in one year expressed in European terms
Utilize the following data:
- S1 = Current spot rates in one year expressed in European terms from above.
- Each country’s Inflation, GDP deflator (annual %) from your last week’s worksheet.
- US Inflation, GDP deflator (annual %) of 1.8%. (Instructor may update)
1. United Kingdom -
Future Spot Rate in One Year Based on Estimated Inflation Rates Show initial equation and its terms and not just the final answer for full credit. |
2. Tanzania
Future Spot Rate in One Year Based on Estimated Inflation Rates Show initial equation and its terms and not just the final answer for full credit. |
TZS -
1 Dollar = 2,298.20 1 TZS = 0.00044 |
GBP
1 Dollar = 0.79
1 Pound = 1.27
TZS INFLATION - 2.7
GBP INFLATION - 2.2
US INFLATION RATE 1.8
International Financial Management
ISBN: 978-0078034657
6th Edition
Authors: Cheol S. Eun, Bruce G.Resnick