Explore BrainMass
Share

Explore BrainMass

    Using PPP/IFE to Determine Exchange Rates

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    An international pension fund manager uses the concepts of purchasing power parity (PPP) and the international fisher effect (IFE) to forecast spot exchange rates. The pension manager gathers the financial information as follows.
    Base Price Level 100
    Current U.S. Price Level 105
    Current South African Price Level 111
    Base Rand Spot Exchange Rate $.175
    Current Rand Spot Exchange Rate $.158
    Expected Annual U.S. Inflation Rate 7%
    Expected Annual South African Inflation 5%
    Expected U.S. One Year Interest Rate 10%
    Expected South African One Year Interest Rate 8%

    Calculate the following exchange rates (ZAR and USD refer to the South African Rand and U.S. dollar respectively):
    a. The current ZAR spot rate in USD that would have been forecast by PPP.
    b. Using IFE the expected ZAR spot rate in USD one year from now.
    c. Using PPP the expected ZAR spot rate in USD four years from now.

    © BrainMass Inc. brainmass.com October 9, 2019, 8:56 pm ad1c9bdddf
    https://brainmass.com/business/foreign-exchange-rates/using-ppp-ife-to-determine-exchange-rates-167648

    Attachments

    Solution Preview

    An international pension fund manager uses the concepts of purchasing power parity (PPP) and the international fisher effect (IFE) to forecast spot exchange rates. The pension manager gathers the financial information as follows.
    Base Price Level 100
    Current U.S. Price Level 105
    Current South African Price Level 111
    Base Rand Spot Exchange Rate $.175
    Current Rand Spot Exchange Rate $.158
    Expected Annual U.S. ...

    Solution Summary

    The solution uses Purchasing Power Parity (PPP) and International Fisher Effect (IFE) to determine Exchange Rates.

    $2.19