Annual inflation rates in the U.S. and Italy are expected to be 4% and 7%, respectively. If the current spot rate is $1 = L2,000, then the expected spot rate for the lira in three years is

Question

Quizplus · Accepted Answer

The correct answer is A because the expected spot rate for the lira in three years is $1 = L2,000 * (1 + 0.07)^3 / (1 + 0.04)^3 = $1 = L2,000 * 1.225043 / 1.124864 = $1 = L2,000 * 0.0004591 = $0.0004591.

Annual Inflation Rates in the U