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Dear Tutor ,
Would you please share how to get the forecast exchange rate in this question when we just provide with the spot rate for both country .
Exchange rate :
Spot $H/$ – 15.80
Spot Bt/$ – 4.20Forecast inflation rates :
Year Singapore Hotternia Bottoniland
1 2% 10% 5%
2 3% 8% 5%
3 3% 8% 5%
4 3% 8% 5%
5 3% 8% 5%Thanks in advance .
Ivy
@Ivy,
If I am understanding the question correctly, you wish to incorporate the effect of the inflation rates to estimate what the future spot rate would be right? In order to do that, you will need to make use of Purchasing Power Parity, but before you can do that, you need to know the inflation rates for $H, $ and Bt. Though you have provided the inflation rates, its not really clear as to which inflation rate relates to which currency. Could you please specify which of the columns above reflect the inflation rates for $H, $ and Bt respectively?
Cheers!- Topics: 1
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Dear Buraag ,
Thanks for your reply .
Please find the inflation rates for each country :
Year Singapore
1 2%
2 3%
3 3%
4 3%
5 3%Year Hotternia
1 10%
2 8%
3 8%
4 8%
5 8%Year Bottoniland
1 5%
2 5%
3 5%
4 5%
5 5%Cheers,
IvyI will illustrate with the $H/$ rate.
The current spot rate is 15.80
The inflation rate for in the first year is 10% and in S is 5%So…using the PPP formula, the forecast of the rate in 1 year is 15.80 x 1.10/1.05
= 16.55You do the same thing each year, and so in the second year the inflation rates are 8% and 3% which means the rate in 2 year will be:
16.55 x 1.08/1.03 = 17.35Sorry for the absence; I realized I was seriously lagging in p4 preparation…I am so0o0 sc…never mind 🙁
And well yes, thats exactly how you do it. 🙂 There is a related post regarding Interest Rate Parity, where the confusion was which rate to use as the numerator and which one to use as the denominator in the formula above. Its a very straightforward process actually but if you do get confused over the same issue, read the posts at here and you should be fine 🙂
Happy studying!
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Thanks John Moffat and Buraag .. Thanks for your excellent explaination in this matter .
Have a great day ahead ..
Regards,
Ivy- Topics: 1
- Replies: 5
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Thanks John Moffat and Buraag .. Thanks for your excellent explaination in this matter .
Have a great day ahead ..
Regards,
Ivy- Topics: 1
- Replies: 5
- ☆
Thanks John Moffat and Buraag .. Thanks for your excellent explaination in this matter .
Have a great day ahead ..
Regards,
Ivy
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