If U.S. prices are expected to rise by 3% over the coming year and prices in Switzerland are expected to rise by 7% during the same time, what is the expected spot rate in one year of the Swiss franc given that the current spot exchange rate is $0.168?

Question

Quizplus · Accepted Answer

The expected change in the exchange rate can be calculated by the following formula:

Expected % change in spot rate = (Foreign country inflation rate - Domestic country inflation rate) / (1 + Domestic country inflation rate)

Expected % change in spot rate = (7% - 3%) / (1 + 3%) = 3.773%
Expected spot rate = Current spot rate * (1 + Expected % change in spot rate)
Expected spot rate = $0.168 * (1 + 3.773%) = $0.1745

Therefore, the expected spot rate in one year of the Swiss franc is $0.1745, which is closest to option C ($0.1617)

If US Prices Are Expected to Rise by 3% Over the the Coming