he spot rate of the New Zealand dollar is $0.80. The spot rate of the Argentine
ID: 2796923 • Letter: H
Question
he spot rate of the New Zealand dollar is $0.80. The spot rate of the Argentine Peso is 0.097 New Zealand dollars. You expect that the one-year inflation rate is 10 percent in the New Zealand, 12 percent in Argentina, and 5 percent in the U.S. The one-year interest rate is 13% in New Zealand, 11% in Argentina, and 7% in the U.S.
Assume that locational arbitrage and triangular arbitrage ensures that spot exchange rates are properly aligned. Also assume that you believe in the International Fisher Effect. What is your expected spot rate of the Argentine Peso in one year with respect to the U.S. dollar?
Explanation / Answer
We have the follwong information:
USD/NZD = 0.80
NZD/Peso = 0.097
Thus Currrent Spot Rate of USD/Peso = NZD/Peso * USD/NZD = 0.097 * 0.80 = 0.0776
That is 0.0776 Peso per Dollar
We now need to calculate expected USD/Peso = Spot USD/Peso * ( 1 + Real Rate in USD) / ( 1 + Real Rate in Peso)
= 0.0776 * ( 1 + 0.07 + 0.05 ) / ( 1 + 0.11 + 0.12)
= 0.0707 peso per dollars
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