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Your company has posted you on a 24-month overseas assignment in Budapest, Hungary. You will be...

Your company has posted you on a 24-month overseas assignment in Budapest, Hungary. You will be living on the Buda side of the river, but will be spending much of your time on the Pest side. The current indirect rate for the Hungarian forint is 191.73 forints per U.S. dollar. If the anticipated inflation rate in the United States is 3.7 % and the anticipated inflation rate in Hungary is 7.2% (annually), what exchange rate do you anticipate at the end of your assignment?

What exchange rate do you anticipate at the end of your assignment? Forints per $

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Answer #1

As per Purchase Price parity theory, Forward rate Spot Rate*(1+Inflation Rate Hungary)/(1+Inflation rate dollar)

= 191.73(1+7.2%)2/(1+3.7%)2

= 204.89 forints per Dollar

Since the assignment is of 24 months, two years inflation has been taken

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