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 Required: 100 105 111 $ 0.189 $ 0.172 78 5% 10% 8%

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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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
100
105
111
$ 0.189
$ 0.172
Required:
Calculate the following exchange rates (ZAR and USD refer to the South African rand and U.S. dollar, respectively):
X Answer is complete but not entirely correct.
$
$
$
7%
5%
a. 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.
ZAR spot rate under PPP
Expected ZAR spot rate
Expected ZAR under PPP
10%
8%
b. 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.
0.2076 x
0.1642 X
0.2328 X
c. 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.
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 Expected U.S. one-year interest rate Expected South African one-year interest rate 100 105 111 $ 0.189 $ 0.172 Required: Calculate the following exchange rates (ZAR and USD refer to the South African rand and U.S. dollar, respectively): X Answer is complete but not entirely correct. $ $ $ 7% 5% a. 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. ZAR spot rate under PPP Expected ZAR spot rate Expected ZAR under PPP 10% 8% b. 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. 0.2076 x 0.1642 X 0.2328 X c. 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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