In the spot market, $1 is currently equal to $\le$.5725. The expected inflation rate in the U.K. is 3 % and in Canada 4 %. What is the expected exchange rate 3 years from now if relative purchasing power parity exists?

Question

Quizplus · Accepted Answer

According to relative purchasing power parity, the expected exchange rate is calculated by adjusting the current exchange rate by the inflation differential. The formula is: Future Exchange Rate = Current Exchange Rate * (1 + Inflation Rate of Foreign Country) / (1 + Inflation Rate of Domestic Country). Applying this: 0.5725 * (1 + 0.04)^3 / (1 + 0.03)^3 = 0.55550.

In the Spot Market, $1 Is Currently Equal To ≤\le≤ 5725 the Expected Inflation Rate in the U

In the Spot Market, $1 Is Currently Equal To $\le$ 5725 the Expected Inflation Rate in the U