The spot exchange rate between Swiss francs and dollars is S₀^SFr/$ = SFr1.7122/$. Expected inflation is 0 percent in Switzerland and 11 percent in the United States. Using relative purchasing power parity, the expected spot rate in one period is E[S₁^SFr/$] = SFr1.5425/$.

Question

Quizplus · Accepted Answer

E[S₁^SFr/$]= S₀^SFr/$(1+E[p^SFr])/(1+E[p^$]) = (SFr1.7122/$)(1.00/1.11) = SFr1.5425/$.

The Spot Exchange Rate Between Swiss Francs and Dollars Is