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A German company is expecting to receive Indian Rupees in one year’s time. The spot rate is Euro 0.12 per 1
Indian Rupee. The company could borrow in Indian Rupees at 6 % or in Euros at 12%. There is no forward rate for
one year’s time. Predict what the exchange rate is likely to be in one year.Hello, can I kindly ask for some guidance on this question please.
Thank you in advance
Although we usually would use purchasing power parity formula to forecast future exchange rates, in the absence of inflation rates in the question we instead use the interest rates and the interest rate parity formula that is given on the formula sheet.
I do explain how to do this in my free lectures on forecasting exchange rates.
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