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Arbitrage and PPP Assume that locational arbitrage ensures that spot exchange rates are properly aligned. Also assume that you believe in purchasing power parity. The spot rate of the British pound is $1.80. The spot rate of the Swiss franc is .3 pounds. You expect that the one-year inflation rate is 7 percent in the United Kingdom, 5 percent in Switzerland, and 1 percent in the United States. The one-year interest rate is 6 percent in the United Kingdom, 2 percent in Switzerland, and 4 percent in the United States. What is your expected spot rate of the Swiss franc in one year with respect to the U.S. dollar?

Arbitrage and PPP Assume that locational arbitrage ensures that spot exchange rates are properly aligned. Also assume that you believe in purchasing power parity. The spot rate of the British pound is $1.80. The spot rate of the Swiss franc is .3 pounds. You expect that the one-year inflation rate is 7 percent in the United Kingdom, 5 percent in Switzerland, and 1 percent in the United States. The one-year interest rate is 6 percent in the United Kingdom, 2 percent in Switzerland, and 4 percent in the United States. What is your expected spot rate of the Swiss franc in one year with respect to the U.S. dollar?

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Arbitrage and PPP

Assume that locational arbitrage ensures that spot exchange rates are properly aligned. Also assume that you believe in purchasing power parity. The spot rate of the British pound is $1.80. The spot rate of the Swiss franc is .3 pounds. You expect that the one-year inflation rate is 7 percent in the United Kingdom, 5 percent in Switzerland, and 1 percent in the United States. The one-year interest rate is 6 percent in the United Kingdom, 2 percent in Switzerland, and 4 percent in the United States. What is your expected spot rate of the Swiss franc in one year with respect to the U.S. dollar? 

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