The inflation rate is 3% in Euroland and 8% in Japan. The spot ER between Japane
ID: 2742941 • Letter: T
Question
The inflation rate is 3% in Euroland and 8% in Japan. The spot ER between Japanese yen and Euro is Yen100/euro1. What is the forward or expected spot exchange rate among the 2 currencies? The inflation rate is 3% in Euroland and 8% in Japan. The spot ER between Japanese yen and Euro is Yen100/euro1. What is the forward or expected spot exchange rate among the 2 currencies? The inflation rate is 3% in Euroland and 8% in Japan. The spot ER between Japanese yen and Euro is Yen100/euro1. What is the forward or expected spot exchange rate among the 2 currencies?Explanation / Answer
The Formula for Computing the forward rate using the inflation rates in domestic and foreign counries is as follows:
F = S (1+ID) / (1+IF)
Where F = Forward rate of foreign Currency and S = Spot rate
ID = Domestic Inflation rate and IF = Inflation rate in foreign country
F = 100 (1+0.08) / (1+0.03) = 104.85Yen / Euro1.
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