inflation rates in the U.S. and France in January 1991 were expected to be 4% per annum and 7% per annum, respectively. If the current spot rate that day was $.1050, then the expected spot rate in three years was

Question

Quizplus · Accepted Answer

The expected spot rate in three years can be calculated using the formula:

Expected spot rate = Current spot rate x (1 + foreign inflation rate) / (1 + domestic inflation rate)^(number of years)

Substituting the given values, we get:

Expected spot rate = $.1050 x (1 + 0.07) / (1 + 0.04)^3 
Expected spot rate = $.1050 x 1.07 / 1.125 
Expected spot rate = $.099428

Rounding off to four decimal places, the expected spot rate in three years is $.0964. Therefore, the best choice is C).

Inflation Rates in the U