A)Currently, you can exchange $1 for SF 1.14. Assume that the average inflation

Question

A)Currently, you can exchange $1 for SF 1.14. Assume that the average inflation rate in the U.S. over the next two years will be 2.5 percent annually as compared to 3 percent in Switzerland. Based on this information and relative purchasing power parity, which one of the following assumptions can you make regarding the next two years?

Both the U.S. dollar and the Swiss franc will appreciate against all other currencies.

B)You are planning an extended trip to Hong Kong. You have located some housing that you can lease for 11,250 Hong Kong dollars per month. What is the cost per month in U.S. dollars if the exchange rate is HK$1 = $0.1290?

The Swiss franc will appreciate against all currencies. The Swiss franc will appreciate against the U.S. dollar. The U.S. dollar will appreciate against all currencies. The U.S. dollar will appreciate against the Swiss franc.

Both the U.S. dollar and the Swiss franc will appreciate against all other currencies.

B)You are planning an extended trip to Hong Kong. You have located some housing that you can lease for 11,250 Hong Kong dollars per month. What is the cost per month in U.S. dollars if the exchange rate is HK$1 = $0.1290?

$1,208.15 $1,451.25 $78,311.27 $81,395.35 $87,209.30

Explanation / Answer

The US dollar will appreciate against Swiss franc as due to lower inflation in US, US dollar will loose less value as compared to the swiss franc.

Today $1 = SF1.14.

After 1 year $1 will be worth 1*(1+0.025)^2 = $1.0506

After 1 year 1.14 SF will be worth 1.14*(1+0.03) = SF1.2094

Hence $1 = SF1.1511

b) $1451.25

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