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Suppose inflation in the US is projected to be 2% in the coming year. The current...

Suppose inflation in the US is projected to be 2% in the coming year. The current spot rate is USDBRL 3.1139 and you think the spot rate in 1 year will be USDBRL 3.38877. What is your forecast for inflation in Brazil in the coming year?

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Answer #1

Consider the formula

S1 / S0 = (1 + Iy) ÷ (1 + Ix)

Where,
S0 is the spot exchange rate at the beginning of the time period (measured as the "y" country price of one unit of currency x)
S1 is the spot exchange rate at the end of the time period.
Iy is the expected annualized inflation rate for country y, which is considered to be the foreign country.
Ix is the expected annualized inflation rate for country x, which is considered to be the domestic country.


3.38877/3.1139 =(1+Iy)/ (1+2)

1+Iy = 3.2648

inflation forecast in brazil in the coming year is 2.2648

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