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2)   If the spot rate is CHF 1.600=$1 USD, and the expected inflation rates for Switzerland and the United States are 3% and 5% respectively, the   USD is expected to depreciate versus the CHF USD is expected to appreciate versus the CHF CHF is expected to depreciate versus the USD CHF is expected to remain the same versus the USD JPY would probably appreciate versus the USD and CHF

2)   If the spot rate is CHF 1.600=$1 USD, and the expected inflation rates for Switzerland and the United States are 3% and 5% respectively, the   USD is expected to depreciate versus the CHF USD is expected to appreciate versus the CHF CHF is expected to depreciate versus the USD CHF is expected to remain the same versus the USD JPY would probably appreciate versus the USD and CHF

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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12)   If the spot rate is CHF 1.600=$1 USD, and the expected inflation rates for Switzerland and the United States are 3% and 5% respectively, the

 

  1. USD is expected to depreciate versus the CHF
  2. USD is expected to appreciate versus the CHF
  3. CHF is expected to depreciate versus the USD
  4. CHF is expected to remain the same versus the USD
  5. JPY would probably appreciate versus the USD and CHF
Expert Solution
Step 1 Relative version of Purchasing power parity theory

The relative version of purchasing power parity theory, explains why or how the exchange rates between currencies change or fluctuate over a period of time. According to this, one of the factors leading to change in exchange rates between currencies is 'inflation' in the respective countries. The exchange rate change would be equal to the inflation rate differential. According to this theory, the relationship between the change in the exchange rate and the inflation rate differential is expressed as:

e1=eo1+ih,t1+if.teo=spot rate (current)ih,t=inflation rate of home country (Switzerland)if.t=inflation rate of foreign country (USA) 

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