Question

1. The spot rate for the Omani Rial is $2.6008/Rial. The U.S. inflation rate is anticipated to be 1.3%. The Oman inflation rate is expected to be 7.5%. Both countries are expected to have a real interest rate of 1.5%. Show calculations.

A.) Based on the Fisher effect, calculate the U.S. nominal interest rate (x.xx%).

B.) Based on the Fisher effect, calculate the Uzbekistan nominal interest rate (x.xx%).

C.) Using purchasing power parity, calculate the expected spot rate in 1 year.

D.) Using the international Fisher effect, calculate the expected spot rate in 2 years.

Answer 1

A) US nominal Rate =(1+US Real Rate)*(1+Inflation)-1 =(1+1.5%)*(1+1.3%)-1 =2.8195% or 2.82%

B) Oman nominal Rate =(1+Oman Real Rate)*(1+Inflation)-1 =(1+1.5%)*(1+7.5%)-1 =9.1125% or 9.11%

C) Expected Spot Rate in 1 year using Purchasing Power =Spot Rate*(1+US Inflation)/(1+Oman IInflation)
=2.6008*(1+1.3%)/(1+7.5%) =2.4508

D) Expected Spot Rate in 2 year using International Fischer effect
=Spot Rate*(1+US nominal rate )^2/(1+Oman nominal rate)^2
=2.6008*(1+2.8195%)^2/(1+9.1125%)^2=2.3095