Question

Suppose the current exchange rate for the Polish zloty is Z2.89. The expected exchange rate in three years is Z2.97. What is the difference in the annual inflation rates for the United States and Poland over this period? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

   

Difference in annual inflation rates

%

Answer 1

Solution:

The formula for calculating the annual inflation rate differential is

= [ ( Forward rate – Spot rate ) / Spot rate ] * ( 12 / Period of the quote in months ) * 100

As per the information given in the question we have

Expected exchange rate in 3 years = Forward rate = Z2.97      ; Current Exchange rate = Spot rate = Z2.89   ;

Period of the quote = 3 Years * 12 = 36 months

Applying the above values in the formula we have

= [ ( 2.97 – 2.89 ) / 2.89 ] * ( 12 / 36 ) * 100

= [ 0.08 / 2.89 ] * 0.333333 * 100

= 0.027682 * 0.333333 * 100

= 0.922722 %  

= 0.92 % ( when rounded off to two decimal places )

The Difference in annual inflation rates is = 0.92 %