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ABC is considering opening up a subsidiary in Utopia, a newly independent country. The company’s Foreign...

ABC is considering opening up a subsidiary in Utopia, a newly independent country. The company’s Foreign Exchange Division (FED) is tasked with forecasting the value of Utopia’s currency. How should FED go about accomplishing its task?

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ANSWER DOWN BELOW. FEEL FREE TO ASK ANY DOUBTS. THUMBS UP PLEASE.

FED Can accomplish the task by appropriately looking at the:

1. Interest rate parity:

As per Interest rate parity the difference in spot fate and forward rate exits due to differences in interest rate between two countries.

F/S = (1+ra)/(1+rb)

F= forward rate

S = spot rate.

ra = interest rate of price currency.

rb= interest rate of base currency.

2. Purchasing power parity:

As per Purchasing power parity- the difference in spot fate and forward rate exits due to differences in inflation between two countries.

Es/S = (1+Ia)/(1+Ib)

Es= Expected exchange rate.

S = spot rate.

Ia = inflation rate of price currency.

Ib= inflation rate of the base currency.

3. The relative strength of both economics.

A lower strength economies currency depreciates in comparison to A higher strength economies currency.

4. Econometric Model:

Laking various factors of the economy into consideration like gross domestic product growth rate differential, income growth rate differential, the interest rate differential between two countries etc.

jeff jeffy answered 2 years ago
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