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 100 Current U.S. price level 105 Current South African price level 111 Base rand spot exchange rate$0.194 Current rand spot exchange rate$0.177 Expected annual U.S. inflation 7%Expected annual South African inflation 5%Expected U.S. one-year interest rate 10%Expected South African one-year interest rate 8% 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.) 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.)

Given information,Base price level100Current U.S. price level105Current South African price…

Answered: An international pension fund manager,…

Managerial Accounting: The Cornerstone of Business Decision-Making

7th Edition

ISBN:9781337115773

Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Chapter13: Emerging Topics In Managerial Accounting

Section: Chapter Questions

Problem 47E: Match each term in Column A with its related definition in Column B. Column A 1. ____________ Spot...

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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		100
Current U.S. price level		105
Current South African price level		111
Base rand spot exchange rate	$	0.194
Current rand spot exchange rate	$	0.177
Expected annual U.S. inflation		7	%
Expected annual South African inflation		5	%
Expected U.S. one-year interest rate		10	%
Expected South African one-year interest rate		8	%

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.)

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.)

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