Suppose the spot exchange rate for the Hungarian forint is HUF 203.74. The infla
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Question
Suppose the spot exchange rate for the Hungarian forint is HUF 203.74. The inflation rate in the United States will be 1.1 percent per year. It will be 4.1 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 203.74. The inflation rate in the United States will be 1.1 percent per year. It will be 4.1 percent in Hungary.
Explanation / Answer
The exchange rate of united state (in$) will be in one year = (spot rate * inflation rate of hungary) / inflation rate of US
= (203.74 * 1.041) / 1.011
=209.79
The exchange rate of united state (in$) will be in Two year = [spot rate * (inflation rate of hungary*2)) / (inflation rate of US)*2
Inflation rate of hungary in 5year = 1.041 * 1.041 = 1.0816
Inflation rate of united states in 5year = 1.011*1.011 = 1.022121
= [203.74 * (1.041*2)] / [1.011*2]
=203.74* 1.0816 / 1.022121
=215.60
The exchange rate of united state (in$) will be in five year = [spot rate * (inflation rate of hungary*5)) / (inflation rate of US)*5
Inflation rate of hungary in 5year = 1.041 * 1.041* 1.041* 1.041* 1.041 = 1.2225
Inflation rate of united states in 5year = 1.011* 1.011* 1.011* 1.011* 1.011 = 1.0562
= [203.74 * (1.2225)] / [1.0562]
=235.82
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