Question
In: Finance
if the inflation rate in the UK is higher than the inflation rate in the US...
if the inflation rate in the UK is higher than the inflation rate in the US by 3% according to the relative PPP theory, what is your prediction of the British pound FX rate in one year if the current spot rate is 1.20/BP (calculate future spot rate in one year)
Solutions
Expert Solution
British pound FX rate in one year = current spot rate /(1+%increased inflation)
= 1.20 /(1+.03)
= 1.20/1.03
= $ 1.16505 per BP (or rounded to $ 1.165 per BP)
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