Omni Advisors, 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 $ 0.192 Current rand spot exchange rate $ 0.175 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% Required: Calculate the following exchange rates (ZAR and USD refer to the South African rand and U.S. dollar, respectively): The current ZAR spot rate in USD that would have been forecast by PPP. Note: Do not round intermediate calculations. Round your answer to 4 decimal places. Using the IFE, the expected ZAR spot rate in USD one year from now. Note: Do not round intermediate calculations. Round your answer to 4 decimal places. Using PPP, the expected ZAR spot rate in USD four years from now. Note: Do not round intermediate calculations. Round your answer to 4 decimal places.
Omni Advisors, 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 $ 0.192 Current rand spot exchange rate $ 0.175 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% Required: Calculate the following exchange rates (ZAR and USD refer to the South African rand and U.S. dollar, respectively): The current ZAR spot rate in USD that would have been forecast by PPP. Note: Do not round intermediate calculations. Round your answer to 4 decimal places. Using the IFE, the expected ZAR spot rate in USD one year from now. Note: Do not round intermediate calculations. Round your answer to 4 decimal places. Using PPP, the expected ZAR spot rate in USD four years from now. Note: 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
Section: Chapter Questions
Problem 1PS
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Question
Omni Advisors, an international pension fund manager, uses the concepts of
| Base price level | 100 |
|---|---|
| Current U.S. price level | 105 |
| Current South African price level | 111 |
| Base rand spot exchange rate | $ 0.192 |
| Current rand spot exchange rate | $ 0.175 |
| 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% |
Required:
Calculate the following exchange rates (ZAR and USD refer to the South African rand and U.S. dollar, respectively):
-
The current ZAR spot rate in USD that would have been forecast by PPP.
Note: Do not round intermediate calculations. Round your answer to 4 decimal places.
-
Using the IFE, the expected ZAR spot rate in USD one year from now.
Note: Do not round intermediate calculations. Round your answer to 4 decimal places.
-
Using PPP, the expected ZAR spot rate in USD four years from now.
Note: Do not round intermediate calculations. Round your answer to 4 decimal places.
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