Question

C. 1)The inflation rates in the British pound and the Australian dollar are 12% and 8% respectively. What should the Sex /Forward ER be, if the Spot ER is BP/ A$ .5?
2) Describe the concept of purchasing power.

Answer 1

Solution :- (1)

As per purchasing power parity theory

Forward Rate ( A$ / BP ) = Spot Rate ( A$ / BP ) * ( 1 + A$ inf Rate ) / ( 1 + BP inf Rate )

Forward Rate ( A$ / BP ) = A$ 0.50 * ( 1 + 0.08 ) / ( 1 + 0.12 )

Forward Rate ( A$ / BP ) = 0.482  

Forward Rate ( A$ / BP ) = ( A$ 0.482 / BP )

(2)

Purchasing Power concept describes the purchasing power of goods in one country with respect to the other country by taking inflation .

Purchasing power refers value of a currency expressed in terms of the number of goods or services that a single unit of currency can buy.

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