Question

Purchasing Power Parity If the current spot rate between the U.S. dollar and the Swedish krona was $1 = 7.6123 krona, and if the inflation rate in the United States was 5.7 percent and in Sweden it was 2.7 percent, then what would be the expected spot rate in one year? (Round your answer to 4 decimal places.)

Purchasing Power Parity If the current spot rate between the U.S. dollar and the Swedish krona was $1 = 7.6423 krona, and if the inflation rate in the United States was 6.0 percent and in Sweden it was 3.0 percent, then what would be the expected spot rate in one year? (Round your answer to 4 decimal places.)

Exchange Rate Risk A U.S. firm is expecting cash flows of 16.00 million Mexican pesos and 21.00 million Indian rupees. The current spot exchange rates are: $1 = 11.521 pesos and $1 = 45.545 rupees. If these cash flows are not received for one year and the expected spot rates at that time will be $1 = 11.285 pesos and $1 = 45.025 rupees, then what is the difference in dollars received that was caused by the delay? (Round your answer to 4 decimal places.)

Answer 1

Part A:

Acc to PPPT,

FWd Rate = Spot rate * ( 1+Hi ) / ( 1+Fi )

Hi - Inflation Rate in Sweden

Fi = Inflation rate in US

= 7.6123 * ( 1 + 0.027 ) / ( 1 + 0.057 )

= 7.6123 * 1.027 / 1.057

= Swedish Krona 7.3962

Part B:

Acc to PPPT,

FWd Rate = Spot rate * ( 1+Hi ) / ( 1+Fi )

Hi - Inflation Rate in Sweden

Fi = Inflation rate in US

= 7.6423 * ( 1 + 0.03 ) / ( 1 + 0.06 )

= 7.6423 * 1.03 / 1.06

= Swedish Krona 7.4260

Part C:

Value of Receivables today:

Particulars	Amount in FC	Exchange Rate	Amount in USD
From Mexico	MXP 16M	1USD = 11.521Pesos	13,88,768.34
From India	INR 21M	1USD = 45.545 INR	4,61,082.45
Value of Receivables Today	18,49,850.78

Value after 1 Year:

Particulars	Amount in FC	Exchange Rate	Amount in USD
From Mexico	MXP 16M	1USD = 11.285Pesos	14,17,811.25
From India	INR 21M	1USD = 45.025 INR	4,66,407.55
Value after 1 Year	18,84,218.81

Difference = 1884218.81 - 1849850.78

= USD 34368.03

Pls do rate, if the answer is correct and Comment, if any further assistance is required