Ask Question
BusinessBusiness
9 May, 02:35

Suppose the spot exchange rate for the Hungarian forint is HUF 203.86. The inflation rate in the United States will be 1.2 percent per year. It will be 4.2 percent in Hungary. a. What do you predict the exchange rate will be in one year? b. What do you predict the exchange rate will be in two year? c. What do you predict the exchange rate will be in five year?

+5
Answers (1)
  1. 9 May, 03:18
    0
    (1) Exchange Rate in 1 year = HUF 209.90 / $ (2) Exchange Rate in 2 years = HUF 216.12 / $ (3) Exchange Rate in 5 years = HUF 235.92 / $

    Explanation:

    Solution

    Given that:

    The Spot Rate = HUF 203.86 / $

    This implies that 1 dollar is equivalent to 203.86 Hungarian Forint

    Now

    (1) The exchange rate in one year

    The Purchasing power parity equation is shown below:

    Thus

    E (S1) / S0 = (1 + RA) / (1 + RB)

    Here

    E (S1) = Expected Spot Rate of Year 1

    S0 = Current Spot Rate - 203.86

    RA = Inflation Rate in Hungary - 4.2%

    RB = Inflation Rate in United States - 1.2%

    Hence

    The Exchange Rate in 1 year will be:

    E (S1) / S0 = (1 + RA) / (1 + RB)

    E (S1) / 203.86 = (1 + 0.042) / (1 + 0.012)

    E (S1) / 203.86 = 1.042 / 1.012

    E (S1) = (1.042 * 203.86) / 1.012

    E (S1) = 209.90

    Exchange Rate in 1 year is HUF 209.90 / $

    (2) The exchange rate in 2 years

    Thus

    E (S2) / S1 = (1 + RA) / (1 + RB)

    E (S2) = Expected Spot Rate of Year 2

    S1 = Spot Rate of Year 1 - 209.90

    RA = Inflation Rate in Hungary - 4.2%

    RB = Inflation Rate in United States - 1.2%

    Hence

    The exchange rate in 2 years is HUF 216.12 / $

    (3) Exchange Rate in 5 years

    The first step here is to compute the expected spot rate of year 3 and year 4 respectively

    So,

    E (S3) / S2 = (1 + RA) / (1 + RB)

    E (S3) = Expected Spot Rate of Year 3

    S2 = Spot Rate of Year 2 - 216.12

    RA = Inflation Rate in Hungary - 4.2%

    RB = Inflation Rate in United States - 1.2%

    E (S3) = (216.12 * 1.042) / 1.012

    E (S3) = 222.53

    E (S4) / S3 = (1 + RA) / (1 + RB)

    Now

    E (S4) = Expected Spot Rate of Year 4

    S3 = Spot Rate of Year 3 - 222.53

    RA = Inflation Rate in Hungary - 4.2%

    RB = Inflation Rate in United States - 1.2%

    E (S4) = (222.53 * 1.042) / 1.012

    E (S4) = 229.13

    Thus

    The exchange rate in year 5 is given below:

    E (S5) / S4 = (1 + RA) / (1 + RB)

    E (S5) = Expected Spot Rate of Year 5

    S4 = Spot Rate of Year 4 - 229.13

    RA = Inflation Rate in Hungary - 4.2%

    RB = Inflation Rate in United States - 1.2%?

    E (S5) = (229.13 * 1.042) / 1.012

    E (S5) = 235.92

    Therefore the exchange rate in 5 years is HUF 235.92 / $
Know the Answer?
Not Sure About the Answer?
Get an answer to your question ✅ “Suppose the spot exchange rate for the Hungarian forint is HUF 203.86. The inflation rate in the United States will be 1.2 percent per ...” in 📙 Business if there is no answer or all answers are wrong, use a search bar and try to find the answer among similar questions.
Search for Other Answers
You Might be Interested in
When demand is perfectly inelastic, the demand curve will be Group of answer choices negatively sloped, because buyers decrease their purchases when the price rises.
Answers (1)
Amounts billed to clients for services rendered $ 172,000 $ 222,000 Cash collected from clients 159,000 189,000 Cash disbursements Salaries paid to employees for services rendered during the year 89,000 99,000 Utilities 29,500 39,000 Purchase of
Answers (1)
The skills section of the resume should include skills that you've gained both in school and hobbies but should be skills that are to what the employer is looking for. unrelated opposite different related
Answers (1)
What items are found in the MICR line on a check?
Answers (1)
This principle suggests that a certain amount of money today has different buying power than the same amount of money in the future.
Answers (1)
New Questions in Business
The total amount of money the federal government owes to its creditors is the
Answers (1)
Determine the cost of the land, based on the following data. Land purchase price $90,000 Broker's commission 7,500 Payment for the demolition and removal of existing building 2,500 Cash received from the sale of materials salvaged from the
Answers (1)
A truck costing $12,100, which has Accumulated Depreciation of $9,010, was sold for $2,010 cash. The entry to record this event would include a: -loss of $1,080. -gain of $1,080. -credit to the Vehicles account for $3,090.
Answers (1)
Yolanda buys a house in the mountains for $450,000 which she uses as her personal vacation home. she builds an additional room on the house for $40,000.
Answers (1)
Fleet Foot Shoes has been successful at differentiating itself from competitors by claiming a premium price for its athletic footwear based on superior design and high-quality materials.
Answers (1)
Home » Business » Suppose the spot exchange rate for the Hungarian forint is HUF 203.86. The inflation rate in the United States will be 1.2 percent per year. It will be 4.2 percent in Hungary. a. What do you predict the exchange rate will be in one year? b.
Sign Up Forgot Password?