Question

Suppose the spot exchange rate for the Hungarian forint is HUF 289.97. The inflation rate in the United States will be 2.9 percent per year. It will be 4.5 percent in Hungary.

What do you predict the exchange rate will be in one year? (Round your answer to 2 decimal places, e.g., 32.16.)

What do you predict the exchange rate will be in two years? (Round your answer to 2 decimal places, e.g., 32.16.)

What do you predict the exchange rate will be in five years? (Round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

F = S * [(1 + inflation rate in Hungary)/(1 + inflation rate in the U.S.)]^n

What do you predict the exchange rate will be in one year?

F = 289.97 * [(1 + 0.045)/(1 + 0.029)]^1

F = 289.97 * 1.0155490768^1

F = 294.4787657997

F = 294.48 HUF/USD

What do you predict the exchange rate will be in two years?

F = 289.97 * [(1 + 0.045)/(1 + 0.029)]^2

F = 289.97 * 1.0155490768^2

F = 299.0576387451

F = 299.06 HUF/USD

What do you predict the exchange rate will be in five years?

F = 289.97 * [(1 + 0.045)/(1 + 0.029)]^5

F = 289.97 * 1.0155490768^5

F = 313.2258864832

F = 313.23 HUF/USD