(1) If inflation in Sweden is projected at 5% annually for the next 5 years and...
(1) If inflation in Sweden is projected at 5% annually for the
next 5 years and 12% in Turkey. If Lira/Krona is 205.56, calculate
the exact relative PPP value of the spot rate 5 years from
now?
(2) Assume that the spot exchange rate (SF/$) is currently 1.8960.
U.S treasury securities with 3 years to maturity currently yield
6.68% per year, while the interest rate on comparable Swiss
securities is 7.44%. Assuming annual compounding, what is the
expected spot exchange rate SF/$ in 3 years if IFE holds
exactly?
Homework Answers
| 1] | Relative PPP value = 205.56*(1.12/1.05)^5 = | 283.8456 |
| 2] | Expected spot rate = 1.8960*(1.0744/1.0668)^3 = | 1.9368 |
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