Maria Elena Sanchez, a young accountant in Madrid, is about to take the trip of a lifetime to Tahiti. She is trying to plan her expenses carefully so that she can afford to buy some exotic black pearls while she is there. Her friend at a Madrid bank tells her that the spot exchange rate for the French Polynesian franc is XPF92.15/$, but there are no forward quotations. Maria Elena is not going for six months, so she is afraid that the exchange rate will change before she leaves. Her friend tells her that expected inflation in the U.S. for the next year is 3.5 percent (1.75 percent for six months), and for French Polynesia it is 8 percent (4.00 percent for six months). According to purchasing power parity, what is the future spot rate?

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The Answer of Maria Elena Sanchez, a young accountant in Madrid, is about to take the trip of a lifetime to Tahiti. She is trying to plan her expenses carefully so that she can afford to buy some exotic black pearls while she is there. Her friend at a Madrid bank tells her that the spot exchange rate for the French Polynesian franc is XPF92.15/$, but there are no forward quotations. Maria Elena is not going for six months, so she is afraid that the exchange rate will change before she leaves. Her friend tells her that expected inflation in the U.S. for the next year is 3.5 percent (1.75 percent for six months), and for French Polynesia it is 8 percent (4.00 percent for six months). According to purchasing power parity, what is the future spot rate?

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