Question
In: Finance
Currently, an ounce of gold costs USD 1715, and CHF 1673. One year ago, it cost...
Currently, an ounce of gold costs USD 1715, and CHF 1673. One year ago, it cost USD 1681, and CHF 1648. Assume the Law of One Price holds for this question.
2A. What is the current spot rate between USD and CHF?
2B. What is the USD inflation rate?
2C. What is the CHF inflation rate?
2D. What would you expect the USD to CHF spot rate to be in 1 year?
Solutions
Expert Solution
Ans : Law of one price is an economic concept
that states that the price of identical goods will have the same
price globally after taking the currency exchange into
consideration.
a) Current spot rate between USD and CHF
An ounce of gold costs USD 1715 and CHF 1673
therefore,
USD to CHF = Cost of Gold in CHF / Cost of Gold in USD
= 1673 / 1715
USD to CHF = 0.9755
Current spot rate between USD and CHF :
1 USD = 0.9755 CHF
b) USD Inflation Rate
Current gold cost = 1715
One yr ago cost = 1681
Inflation Rate = [ (1715-1681) / 1681 ]*100
Inflation Rate = 2.023% =~2.02%
C) CHF Inflation Rate
Current gold cost = 1673
One yr ago cost = 1648
Inflation Rate = [ (1673 - 1648) / 1648 ] * 100
Inflation Rate = 1.517% = ~1.52%
D) USD to CHF spot rate in one year
| USD | CHF | |
| Spot Price | 1 | 0.9755 |
| Inflation Rate | 2.02% | 1.52% |
| 1 year spot price (Spt price + inflation rate) |
1.0202 | 0.9903 |
| 1 year spot rate | 1 | 0.9707 (0.9903 / 1.0202) |
Ans: USD to CHF spot rate in 1 year will be : 1 USD =
0.9707 CHF
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