FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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Transcribed Image Text:Omni Advisors, an international pension fund manager, uses the concepts of purchasing power parity (PPP) and the International
Fisher Effect (IFE) to forecast spot exchange rates. Omni gathers the financial information as follows:
Base price level
Current U.S. price level
Current South African price level
Base rand spot exchange rate
Current rand spot exchange rate
Expected annual U.S. inflation
Expected annual South African inflation.
Expected U.S. one-year interest rate
Expected South African one-year interest rate
ZAR spot rate under PPP
100
105
111
$0.190
$0.173
Calculate the following exchange rates (ZAR and USD refer to the South African rand and U.S. dollar, respectively):
a. The current ZAR spot rate in USD that would have been forecast by PPP. (Do not round intermediate calculations. Round your
answer to 4 decimal places.)
Expected ZAR spot rate
10%
8%
138
11%
b. Using the IFE, the expected ZAR spot rate in USD one year from now. (Do not round intermediate calculations. Round your
answer to 4 decimal places.)
c. Using PPP, the expected ZAR spot rate in USD four years from now. (Do not round intermediate calculations. Round your answer
to 4 decimal places.)
Expected ZAR under PPP
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