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Purchasing Power Parity Formula

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Purchasing Power Parity Formula

  • This topic has 3 replies, 3 voices, and was last updated 6 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • June 2, 2015 at 8:09 pm #252154
    seanog91
    Member
    • Topics: 83
    • Replies: 54
    • ☆☆

    Hi,

    Is the formula Forward Rate = Current Spot Rate[1+inflation in the home country / 1+ inflation in the second country)]

    In the BPP kit it is the other way around but i always thought it was the above,

    Thanks

    June 3, 2015 at 6:44 am #252258
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54668
    • ☆☆☆☆☆

    BPP are correct (and it is the same as I say in the free lecture also).

    However, in deciding which country is which, it depends which way round the currencies are quoted.

    If the quote is (for example) US$ to the GBP, then the ‘home’ country (on the bottom of the equation) is GBP and the ‘other’ country (on the top of the equation) is US$.

    However if the quote is GBP to the US$, then the ‘home’ country (on the bottom of the equation) is US$ and the ‘other’ country (on the top of the equation) is GBP.

    August 21, 2018 at 4:48 pm #468765
    Nhan
    Member
    • Topics: 4
    • Replies: 7
    • ☆

    If quoted as GPB 0.1430 = $1, thereby the home country is Dollar and other country is GPB. The value “1” relfects that it is the home country, is it right? Thanks.

    August 21, 2018 at 4:52 pm #468766
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54668
    • ☆☆☆☆☆

    That is correct 🙂

  • Author
    Posts
Viewing 4 posts - 1 through 4 (of 4 total)
  • The topic ‘Purchasing Power Parity Formula’ is closed to new replies.

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