International Finance

(Ch. 8) Estimating Depreciation Due to PPP. Assume that St = 1.25 GBPUSD. How will this spot
rate adjust after one year, according to PPP, if the United Kingdom is expected to experience an
inflation rate of 5% while the U.S. is expected to experience an inflation rate of 3%? (6 points)
6. (Ch. 8) Forecasting the Future Spot Rate Based on IFE. Assume that the spot exchange rate of the
Argentine peso (ARS) is USD .011. The 270-day interest rate (annualized) is 1% in the United States
and 8% in Argentina. What will the spot rate ARSUSD be in 9 months, according to the IFE? (You
may use the approximate formula to answer this question.) (6 points)
7. (Ch. 8) Deriving Forecasts of the Future Spot Rate. As of today, assume the following information
is available:
U.S. Mexico
Real rate of interest required by investors 2% 2%
Nominal interest rate 3% 9%
Spot Rate (St) .042 in MXNUSD
One-year forward rate (Ft,1-yr) .039 in MXNUSD
3
a. Use the forward rate to forecast the percentage change in the MXNUSD over the next year. (5 points)
b. Use the differential in expected inflation to forecast the percentage change in the MXNUSD over the
next year. (Hint: you can get the expected inflation using Fisher’s formula –i.e., the nominal interest
rate is equal to the real interest rate plus expected inflation.) (5 points)
c. Use the spot rate to forecast the percentage change in the MXNUSD over the next year. (5 points)