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Suppose that inflation rates in the U.S. and France are expected to be, on average, annually...

Suppose that inflation rates in the U.S. and France are expected to be, on average, annually 7.5% and 7%, respectively, over the next five years. If the current spot rate is $3/FRF, then what is the expected spot value of the franc (USD/FRF) in five years?

Select one:

a. USD3.014/FRF

b. USD2.931/FRF

c. USD3.028/FRF

d. USD3.071/FRF

e. USD0.341/FRF

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Answer #1

As inflation in US is higher, USD depreciate or FRF will appreciate,
Expected Spot=Current Spot*((1+inflation in US)/(1+inflation in France))^t=3*(1.075/1.07)^5=3.071


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