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 Current U.S. price level Current South African price level Base rand spot exchange rate Current rand spot exchange rate Expected annual U.S. inflation Expected annual South African inflation Expected U.S. one-year interest rate Expected South African one-year interest rate 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.) ZAR spot rate under PPP Expected ZAR spot rate 100 105 111 $ 0.186 $ 0.169 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 place 7% 5% 10% 8% Expected ZAR under PPP 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.)
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 Current U.S. price level Current South African price level Base rand spot exchange rate Current rand spot exchange rate Expected annual U.S. inflation Expected annual South African inflation Expected U.S. one-year interest rate Expected South African one-year interest rate 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.) ZAR spot rate under PPP Expected ZAR spot rate 100 105 111 $ 0.186 $ 0.169 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 place 7% 5% 10% 8% Expected ZAR under PPP 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
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text: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
Current U.S. price level
Current South African price level
Base rand spot exchange rate
Current rand spot exchange rate
Expected annual U.S. inflation
Expected annual South African inflation
ZAR spot rate under PPP
100
105
111
Expected U.S. one-year interest rate
Expected South African one-year interest rate
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.)
Expected ZAR spot rate
$ 0.186
$ 0.169
7%
5%
10%
8%
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.)
Expected ZAR under PPP
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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