Question

Suppose the spot exchange rate for the Hungarian forint is HUF 204.46. The inflation rate in the United States will be 1.7 percent per year. It will be 4.7 percent in Hungary.

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

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

c. 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

Answer:

a. the exchange rate will be in one year is HUF 210.49

b. the exchange rate will be in two year is HUF 216.70

c. the exchange rate will be in two year is HUF 236.45

Explanation:

Spot rate (HUF/ USD) = HUF 204.46

Inflation rate in US = 1.7

Inflation rate in Hungary = 4.7

The inflation rate in Hungary is higher than US, then Hungarian forint is likely depreciated compared to USD

According to PPP, the Hungarian forint exchange rate should change  = (1+4.7%)/(1+1.7%) – 1 = 2.95% per year

The future exchange rate = sport rate * (1 +% change)^tenor

a. the exchange rate will be in one year = 204.46 * (1+2.95%) = HUF 210.49

b. the exchange rate will be in two year = 204.46 * (1+2.95%)^2 = HUF 216.70

c. the exchange rate will be in two year = 204.46 * (1+2.95%)^5 = HUF 236.4 5