Further Clarification – Predicting Exchange Rates for Overseas Inv Appraisals

Dear Tutor,

Can you advice please?. 2 Scenarios of deflation in Oversea investment appraisal exchange rate

Scenario 1
Home Country (£)
Foreign Country (Euro)
Spot Rate 0.75Euro/1£

The only information given in the question was ‘It is expected that Pounds (£) will devalue at the rate of 5% pa.

Solution
Year 1 : 0.75 x 0.95 = 0.71 Euro
Year 2 : 0.71 x0.95 = 0.68 Euro
Year 3 : 0.68 x 0.95 = 0.65 Euro

Scenario 2
Home Country (£)
Foreign Country (Euro)
Spot Rate 0.75Euro/1£

The only information given in the question was ‘It is expected that Euro will devalue at the rate of 5% pa.

Solution Suggestion?
Year 1 : 0.75/0.95 = 0.79
Year 2 : 0.79 x 1.05 = 0.83 If i use 0.79/0.95 it gives approx 0.83
Year 3 : 0.83 x 1.05 = 0.87 if i use 0.83/0.95 it also gives 0.87 approx

But this is because i limited my suggested solution in scenario 2 above to 2 decimal places otherwise the exchange values are different . The question actually used 3 decimal places for the exchange values, if i do same, we have different values.

Can i use my suggested method? since it gives almost the same values if i limit to 2 decimal places.

The question may appear too simple, but better for me to ask now rather than thinking in the exam hall the my method used was ok or not

Thanks