Suppose the spot exchange rate for the Hungarian forint is HUF 214. Interest rat

Question

Suppose the spot exchange rate for the Hungarian forint is HUF 214. Interest rates in the United States are 4.8 percent per year. They are 6.7 percent in Hungary.

What do you predict the exchange rate will be in one year? In two years? In five years? (Enter your answer as directed, but do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)

Suppose the spot exchange rate for the Hungarian forint is HUF 214. Interest rates in the United States are 4.8 percent per year. They are 6.7 percent in Hungary.

Explanation / Answer

We need to find the change in the exchange rate over time, so we need to use the interest rate parity relationship:

Ft= S0× [1 + (Rfc– Rus)]t

Rfc => Rate of hungary

Rus => Rate of us currency

t=> time

S0 => spot rate

In one year

f1 => 214 [ 1 + (0.067-0.048) ]1

f1 => 218.07

In two year

f2=> 214 [ 1 + (0.067-0.048) ]2

=> 222.21

In five years

f5=> 214 [ 1 + (0.067-0.048) ]5

=> 235.12

F1 => HUF 218.07

F2 => HUF 222.21

F5 => HUF 235.12

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