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Hello Mr. John
In Blipton International question, the exchange rates are calculated by dividing inflation rate in US by inflation rate in UK. But in the question, it is said that Blipton reports and accounts for all the transactions in dollars.
So, exchange rates should be calculated by dividing inflation rate in UK by inflation rate in US, right?
I am away from home at the moment and so do not have the past exams with me.
Please ask again on Friday which is when I return home, and then I will be able to explain.
Hi Mr.John
In Blipton International question, how to know which is home and which is foreign currency?The cash flows are given in Pounds, and Blipton reports in dollars.
So the exchange rate to convert Pounds to $’s at time 0 is 1/1.4925 = 0.6700. This is the Pound/$ rate.
So to calculate the Pound/$ rate in future years we use $ inflation as the base rate and Pound inflation as the ‘other’ (‘c’) rate. Therefore at time 1 the exchange rate is 0.6700 x 1.025/1.048 =0.6552 (and so on).
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