The current spot rate for the Euro is Rs. 86,the expected inflation rate is 5 in India and 3 in Europe. What is the expected Spot Rate of Euro one year hence?

Question

Quizplus · Accepted Answer

The expected spot rate can be calculated using the International Fisher Effect, which suggests that the currency of the country with a higher inflation rate will depreciate. The formula is S1 = S0 * (1 + i_home) / (1 + i_foreign), where S1 is the expected spot rate, S0 is the current spot rate, i_home is the inflation rate in the home country (India), and i_foreign is the inflation rate in the foreign country (Europe). Plugging in the values: S1 = 86 * (1 + 0.05) / (1 + 0.03) = 87.67.

The Current Spot Rate for the Euro Is Rs