Q23 The following data is available:
Country Y currency Dollar
Country X currency Peso
Country Y interest rate 1% per year
Country X interest rate 3% per year
Country X expected inflation rate 2% per year
Spot exchange rate in Country Y 1.60 peso per $1
What is the current six-monthforward exchange rate inCountry Y (to two decimal places)?
The answer was 1.62 pesos to 1 dollar.
I understood how to calculate interest rate parity but I was confused why inflation was not taken into account.
Thank you.