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Sir
in the case there was a line, “the projections are in money/nominal terms”does this line indicates that projection was adjusted with appropriate inflation rate????
Nominal flows are already adjusted for inflation.
(Only, obviously those given, up to 2006 because from then on there is inflation).Have you not looked at the examiners answer?
No i have seen the examiner answer but i wasn’t sure “why inflation was already been adjusted as i don’t see any particular line that would indicate that inflation has already been adjusted.” that is why i m asking this question :
“the projections are in money/nominal terms”,does this line indicates that projection was already been adjusted with appropriate inflation rate in the case so i don’t have to adjust for the inflation????
and i am confused because in the case, in note section there were inflation rate of 2 countries why didn’t examiner used those
As I have already answered, cash flows expressed in nominal terms are actual cash flows which is what we require for the discounting, and so inflation is of no relevance as far as they are concerned.
The examiner did use the inflation rates given in the question!
Firstly, as again I wrote in my previous reply, the cash flows given are only up to 2006 and the question says that they will inflate thereafter.
Secondly, the inflation rates are used in workings 3 in the PPP equation in order to calculate the future spot exchange rates.
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