The inflation rate in the U.S. is 10%, while the inflation ratein Japan is 3%....

The inflation rate in the U.S. is 10%, while the inflation rate in Japan is 3%. The current exchange rate for the Japanese yen (¥) is $0.0075. After supply and demand for the Japanese yen has adjusted in the manner suggested by purchasing power parity, the new exchange rate for the yen will be:

		$0.0076
		$0.0073
		$0.0070
		$0.0080
		$0.0085

Expert Solution

Fwd rate :

Acc to PPPT,

Fwd rate = Spot rate * [ (1+Hi) / ( 1 + Fi) ]

Hi = Inflation rate in US
Fi = Inflation rate Japan

According to Purchasing power parity Theorm,
Fwd rate After 1 Years = Spot rate * [ ( 1 + Hi ) ^ n ] / [ ( 1 + Fi ) ^ n ]
= $ 0.0075 * [ ( 1 + 0.1) ^ 1 ] / [ ( 1 + 0.03 ) ^ 1 ]
= $ 0.0075 * [ ( 1.1) ^ 1 ] / [ ( 1.03 ) ^ 1 ]
= $ 0.0075 * [ 1.1 ] / [ 1.03 ]
= $ 0.0075 * [ 1.068 ]
= $ 0.008
OPtion D is correct

jeff jeffy answered 2 years ago

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