Question

1)The inflation rates in the British pound and the Australian dollar are 2% and 8% respectively. What should the Sex /Forward ER be, if the Spot ER is BP/ A$ .5?

2) Describe the concept of purchasing power.

Answer 1

1) Forward rate = Spot rate * (1 + Inflation rate in Australian dollar)/(1 + Inflation rate in British Pound)

Forward rate = 0.50 * (1 + 0.08)/(1 + 0.02)

Forward rate = 0.50 * 1.0588235294

Forward rate = BP/A$0.5294117647

2) Purchasing power states how much of the goods and services a unit of currency can buy. Purchasing power is inversely related to inflation. As the inflation rate increases, the purchasing power decreases and vice versa, all else being equal.