FINANCE HW_ WK 10 CH 16 Assessing L-T Debt and Equity Captial Suctire, 19 Intena

Question

FINANCE HW_ WK 10 CH 16 Assessing L-T Debt and Equity Captial Suctire, 19 Intenational Financ e. 19 International Question 9 (of 10) 9. value: 3.00 points 6.8642 krona. Assume the The current spot rate between the US dollar and the Swedish krona is $1 inflation rate in the United States is 8 percent and in Sweden is 2 percent. What is the expected spot rate in one year? (Do not round intermediate calculations and round your final answer to 4 decimal places.) Expected exchange rate Hints ReferenceseBook & Resources Hint 1 Hint #2 Hint #3

Explanation / Answer

This question is based on concept of relative purchasing power parity which explains how inflation rates of two countries affect the exchange rate.

Exchange rate is given as $1 = 6.8642 Krona

6.8642 is the price country A pays for 1 US (country B) dollar

The formula to be used for such questions is

Spot rate at the end of the period = Spot rate at the beginning of the period * (1+ Inflation rate of country A )/(1+ Inflation rate of country B)

Spot rate at the end of the period = Spot rate at the beginning of the period * (1+ Swedish Inflation rate)/(1+ US Inflation rate

Spot rate at the end of the period = 6.8642 * (1.02/1.08) = 6.4828555556 ~= 6.4829

Ans: $1= 6.4829 Krona

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