An international corporation located in Country A is considering a project in th

Question

An international corporation located in Country A is considering a project in the United States.
The currency in Country A, say X, has been strengthening relative to the U.S. dollar; specifically,
the average devaluation of the U.S. dollar has been 2.6% per year (which is projected to
continue). Assume the present exchange rate is 6.4 units of X per U.S. dollar.

(a) What is the estimated exchange rate two years from now?

(b) If currency X was devaluating at the same rate (2.6% per year) relative to the U.S. dollar,
what would be the exchange rate three years from now?

Explanation / Answer

(a) exchange rate two years from now = 6.4 x (1-0.026)2

exchange rate two years from now = 6.0715 units of X per U.S. dollar.

(b) exchange rate three years from now = 6.4 x (1-0.026)3

exchange rate three years from now = 5.914 units of X per U.S. dollar.

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