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Hi John,
Could you kindly explain how the spot rate for month 6 (196) is worked out, where is 217 came from?
I hope your answer will help me to understand the working for month 18.
Thanks in advance.
The spot rate in 1 years time (217) has been calculated using the purchasing power parity formula given on the formula sheet, which inflations rates of 30% and 5% in the two countries. (175 x 1.30/1.05) = 217.
If you are unsure about using the formula then do watch my free lectures on this.
The spot rate in 6 months time has been estimated by taking the average of the spot rate now (175) and the spot rate in 12 months time (217).
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