Suppose the spot exchange rate for the Hungarian forint is HUF 204.22. The inflation rate in the United States will be 1.5 percent per year. It will be 4.5 percent in Hungary.

a. What do you predict the exchange rate will be in one year? (Round your answer to 2 decimal places, e. g., 32.16.)

b. What do you predict the exchange rate will be in two years? (Round your answer to 2 decimal places, e. g., 32.16.)

c. What do you predict the exchange rate will be in five years? (Round your answer to 2 decimal places, e. g., 32.16.)

The answer for all the part is given below in detail

Explanation:

Formula

E (St) = So x [1 + (hFC - hUSA) ]^t

where E (St) is Exchange rate, So = Initial Hungarian Rate, hFC = Hungarian inflation rate, hUSA = American Inflation Rate, t = number of years

E (St) = So x [1 + (hFC - hUSA) ]^t, this formula will be used in the calculation of all three parts

Part-1

t = 1

S0 = HUF 204.22

hFC = 0.045

hUSA = 0.015

Solution

E (S1) = HUF 204.22 x [1 + (0.045 - 0.015) ]^1

= HUF 204.22 x [1 + 0.03]

= HUF 204.22 x 1.03

= HUF 210.3466

Part B)

t = 2

S0 = HUF 204.22

hFC = 0.045

hUSA = 0.015

Solution

E (S2) = HUF 204.22 x [1 + (0.045 - 0.015) ]^2

= HUF 204.22 x [1 + 0.03]^2

= HUF 204.22 x (1.03) ^2

= HUF 204.22 x 1.0609

= HUF 216.656998

Part C)

t = 5

S0 = HUF 204.22

hFC = 0.045

hUSA = 0.015

Solution

E (S5) = HUF 204.22 x [1 + (0.045 - 0.015) ]^5

= HUF 204.22 x [1 + 0.03]^5

= HUF 204.22 x (1.03) ^5

= HUF 204.22 x 1.159274074

= HUF 236.7469515