Suppose the spot exchange rate for the Hungarian forint is HUF 205.30. The infla

Question

Suppose the spot exchange rate for the Hungarian forint is HUF 205.30. The inflation rate in the United States will be 2.4 percent per year. It will be 5.4 percent in Hungary.

What do you predict the exchange rate will be in one year? (Round your answer to 2 decimal places. (e.g., 32.16))

What do you predict the exchange rate will be in two years? (Round your answer to 2 decimal places. (e.g., 32.16))

What do you predict the exchange rate will be in five years? (Round your answer to 2 decimal places. (e.g., 32.16))

Suppose the spot exchange rate for the Hungarian forint is HUF 205.30. The inflation rate in the United States will be 2.4 percent per year. It will be 5.4 percent in Hungary.

Explanation / Answer

Forward Rate HUF/$ / Spot Rate HUF/$ = (1+HUF inflation rate)/(1+$ inflation rate)

FR/205.30 = (1+0.054)/(1+0.024)

In one year, Exchange rate = 211.31 HUF per $

In Two Years

Forward Rate HUF/$ / Spot Rate HUF/$ = (1+HUF inflation rate)^2 / (1+$ inflation rate)^2

FR/205.30 = (1+0.054)^2 / (1+0.024)^2

In two years, Exchange rate = 217.51 HUF per $

In Five Years

Same as above, replace 2 with 5. By solving we get

Exchange rate in 5 years = 237.19 HUF per $

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