Suppose the spot exchange rate for the Hungarian forint is HUF 204.22. The infla

Question

Suppose the spot exchange rate for the Hungarian forint is HUF 204.22. The inflation rate in the United States will be 1.5 percent per year. It will be 4.5 percent in Hungary.

What do you predict the exchange rate will be in one year? (Round your answer to 2 decimal places, e.g., 32.16.)

What do you predict the exchange rate will be in two years? (Round your answer to 2 decimal places, e.g., 32.16.)

What do you predict the exchange rate will be in five years? (Round your answer to 2 decimal places, e.g., 32.16.)

Suppose the spot exchange rate for the Hungarian forint is HUF 204.22. The inflation rate in the United States will be 1.5 percent per year. It will be 4.5 percent in Hungary.

Explanation / Answer

Hungarian forint is HUF 204.22

The inflation rate in the United States will be 1.5

It will be 4.5 percent in Hungary

What do you predict the exchange rate will be in one year?

Now let us find out Exchange rate in one year as follow

F 1 = 204.22 * (1 + ( 0.045 -0.015)

=204.22 * 1.03

=210.35

What do you predict the exchange rate will be in two years?

F 2 = 204.22 * (1 + ( 0.045 -0.015)2)

=204.22 * 1.06

=216.47

What do you predict the exchange rate will be in five  years?

F 5 = 204.22 * (1+ ( 0.045 -0.015)5)

=204.22 * 1.015

=234.85

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