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QUESTION 13 Assume the inflation rate in the U.S. is 0.91 percent. The spot rate for...

QUESTION 13

  1. Assume the inflation rate in the U.S. is 0.91 percent. The spot rate for a foreign currency is 1.4231 while the 1-year forward rate is 1.4375. What is the approximate rate of inflation in the foreign country?

    a

    2.15%
    b

    2.03%
    c

    1.92%
    d

    1.80%
    e

    1.71%
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Homework Answers

Answer #1

Forward Rate =

1.4375 = 1.4231 * (1 + Foreign Inflation Rate) / 1.0091

1.4375 / 1.4231 = (1 + Foreign Inflation Rate) / 1.0091

1+ Foreign Inflation Rate = 1.01011875483 * 1.0091

1+ Foreign Inflation Rate = 1.01931083549

Foreign Inflation Rate = 1.01931083549 - 1

Foreign Inflation Rate = 1.931083549 OR 1.92% (approx)

Option 3 is correct

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