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John, i would like to ensure some way to estimate the currency rate
if wan estimate future spot rate, we can use inflation rate (purchase power parity)
if wan estimate the forward rate, we can use interest rate (interest rate parity)
if wan estimate the future rate, (which the future spot rate are not given, we use the lock in method to estimate the future rate.)are these right ?
for the foreign NPV, it confusing me, with the technical article from afm international NPV part 2,
it said USD is devalue 5 %, ok, it mean we need to mutiple 1.05 because increase in value of money mean it devalue/depreciate, but it only USD, do we are not required find out the euro inflation rate ? and we no need multiple the euro ? and the answer didnt provide detail calculate of these exchange rate, and i think it maybe divide 1.05, but the amount are slightly different, i know afm approximately amount can be accept, but im fear i miss up some part which cause my answer are different with the tutor answer.The statements in your first paragraph are correct 🙂
Regarding your second paragraph, the current exchange rate is such that it would cost €0.7810 to buy 1 $. If the dollar depreciates by 5% then the cost of 1 $ will only be 95% x 0.7810 = €0.7420 (and keep multiplying by 95% each year)
ok, i am slightly understand what sir have clarify it, but i just wondering why my method are not work, you forest it by mutiple 95 % on the euro/$ spot rate, it also consider the euro get strengthen by 5 %, but i increase the $ by 5 % and divide it, it also mean the dollar are weaker. the concept for me seem correct, and both are similar, just one is denominate value 95%, and another is numerator value 105%.
but why the answer quite not similar, and if i just use euro 0.7810/$1.05 for forcast the years. can i get correct ?
It is because the dollar depreciating by 5% is not the same meaning as saying that the euro is increasing by 5%.
Suppose I told you that the price of an apple is €0.78 and that next year the price of apples falls by 5%. Surely it means that the price next year will be 95% x €0.78 🙂
What you were doing would not get full marks, but you would probably only be losing 1 mark from the total.
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