Asked by
Alberto Sutton
on Dec 09, 2024
Verified
Suppose the current spot rate between a foreign country and Canada is Fc54.2 per $1. Expected inflation in the foreign country is 57% and expected inflation in Canada is 4%. If relative PPP holds, what is the expected %age change in the exchange rate over the next year?
A) 29%
B) 48%
C) 53%
D) 64%
E) 106%
Spot Rate
The current market price at which a particular currency can be bought or sold for immediate delivery.
Relative PPP
Relative Purchasing Power Parity, a theory which states that exchange rates between currencies change to compensate for inflation rate differences among countries.
Inflation
How quickly the average cost of goods and services goes up, resulting in reduced purchasing capacity.
- Absorb the essence of purchasing power parity (PPP) and its implications on forex rates.
- Investigate the implications of inflation rates on foreign exchange rates and the determination of international investment strategies.
Verified Answer
JS
Learning Objectives
- Absorb the essence of purchasing power parity (PPP) and its implications on forex rates.
- Investigate the implications of inflation rates on foreign exchange rates and the determination of international investment strategies.