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 100 105 111 $ 0.190 $ 0.173 7% 5% 10% 8% Required: Calculate the following exchange rates (ZAR and USD refer to the South African rand and U.S. dollar, respectively): ZAR spot rate under PPP Expected ZAR spot rate Expected ZAR under PPP a. The current ZAR spot rate in USD that would have been forecast by PPP. Note: 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. Note: Do not round intermediate calculations. Round your answer to 4 de hal places. c. Using PPP, the expected ZAR spot rate in USD four years from now. Note: Do not round intermediate calculations. Round your answer to 4 decimal places.
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 100 105 111 $ 0.190 $ 0.173 7% 5% 10% 8% Required: Calculate the following exchange rates (ZAR and USD refer to the South African rand and U.S. dollar, respectively): ZAR spot rate under PPP Expected ZAR spot rate Expected ZAR under PPP a. The current ZAR spot rate in USD that would have been forecast by PPP. Note: 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. Note: Do not round intermediate calculations. Round your answer to 4 de hal places. c. Using PPP, the expected ZAR spot rate in USD four years from now. Note: Do not round intermediate calculations. Round your answer to 4 decimal places.
Chapter9: Forecasting Exchange Rates
Section: Chapter Questions
Problem 25QA
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