Suppose the spot exchange rate for the Hungarian forint is HUF 203.98. The infla
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Question
Suppose the spot exchange rate for the Hungarian forint is HUF 203.98. The inflation rate in the United States will be 1.3 percent per year. It will be 4.3 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 203.98. The inflation rate in the United States will be 1.3 percent per year. It will be 4.3 percent in Hungary.
Explanation / Answer
Answer:
Inflation Rate in Hungary = 4.3% per year
Inflation Rate in United States = 1.3% per year
Spot Exchange Rate 1 USD = HUF 203.98
We can calculate the future exchange rate by using Inflation Rate Parity Theorem:
(i) Expected Exchange Rate will be in one year
Expected Exchange Rate (HUF/USD) = Spot Rate (HUF/USD) x (1 + Inflation Rate HUF) / (1 + Inflation Rate USD)
FR (HUF/USD) = HUF 203.98 x (1 + 0.043) / (1 + 0.013)
= HUF 210.02
Expected Exchange Rate will be in one year 1 USD = HUF 210.02
(i) Expected Exchange Rate will be in 2 year
Expected Exchange Rate (HUF/USD) = Spot Rate (HUF/USD) x (1 + Inflation Rate HUF)n / (1 + Inflation Rate USD)n
= HUF 203.98 x (1 + 0.043)2 / (1 + 0.013)2
= HUF 203.98 x 1.087849 / 1.026169
= HUF 216.24
Expected Exchange Rate will be in two year 1 USD = HUF 216.24
(i) Expected Exchange Rate will be in 5 year
Expected Exchange Rate (HUF/USD) = Spot Rate (HUF/USD) x (1 + Inflation Rate HUF)n / (1 + Inflation Rate USD)n
= HUF 203.98 x (1 + 0.043)5 / (1 + 0.013)5
= HUF 203.98 x 1.23430231101 / 1.06671211317
= HUF 236.03
Expected Exchange Rate will be in two year 1 USD = HUF 236.03
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