An international pension fund manager, uses the concepts of purchasing power parity (PPP) and the International Fisher Effect (IFE) to forecast spot exchange rates. Omni gathers the financial information as follows:       Base price level   100   Current U.S. price level   105   Current South African price level   111   Base rand spot exchange rate $ 0.194   Current rand spot exchange rate $ 0.177   Expected annual U.S. inflation   7 % Expected annual South African inflation   5 % Expected U.S. one-year interest rate   10 % Expected South African one-year interest rate   8 %   Calculate the following exchange rates (ZAR and USD refer to the South African rand and U.S. dollar, respectively):   a. The current ZAR spot rate in USD that would have been forecast by PPP. (Do not round intermediate calculations. Round your answer to 4 decimal places.)     b. Using the IFE, the expected ZAR spot rate in USD one year from now. (Do not round intermediate calculations. Round your answer to 4 decimal places.)     c. Using PPP, the expected ZAR spot rate in USD four years from now. (Do not round intermediate calculations. Round your answer to 4 decimal places.)

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
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An international pension fund manager, uses the concepts of purchasing power parity (PPP) and the International Fisher Effect (IFE) to forecast spot exchange rates. Omni gathers the financial information as follows:

 

   
Base price level   100  
Current U.S. price level   105  
Current South African price level   111  
Base rand spot exchange rate $ 0.194  
Current rand spot exchange rate $ 0.177  
Expected annual U.S. inflation   7 %
Expected annual South African inflation   5 %
Expected U.S. one-year interest rate   10 %
Expected South African one-year interest rate   8 %
 

Calculate the following exchange rates (ZAR and USD refer to the South African rand and U.S. dollar, respectively):
 

a. The current ZAR spot rate in USD that would have been forecast by PPP. (Do not round intermediate calculations. Round your answer to 4 decimal places.)

 

 

b. Using the IFE, the expected ZAR spot rate in USD one year from now. (Do not round intermediate calculations. Round your answer to 4 decimal places.)

 

 

c. Using PPP, the expected ZAR spot rate in USD four years from now. (Do not round intermediate calculations. Round your answer to 4 decimal places.)

 

 

 

 
 
 
 
 
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