Question

Question 2

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.

a.What is the current spot rate between USD and CHF?

b.What is the USD inflation rate?

c.What is the CHF inflation rate?

d.What would you expect the USD to CHF spot rate to be in 1 year?

Answer 1

a). Current spot rate = gold price in USD/gold price in CHF = 1,715/1,673 = $1.0251/CHF

b). USD inflation rate = (current gold price in USD/last year's gold price in USD) -1

= (1,715/1,681)-1 = 2.02%

c). CHF inflation rate = (current gold price in CHF/last year's gold price in CHF) -1

= (1,673/1,648)-1 = 1.52%

d). Assuming the same inflation rates to hold for the coming year, next year's spot rate will be

current spot rate*(1 + US inflation rate)/(1 + CHF inflation rate)

= 1.0251*(1+2.02%)/(1+1.52%) = $1.03021/CHF