Purchase Solution

Using PPP/IFE to Determine Exchange Rates

Not what you're looking for?

Ask Custom Question

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.

Attachments
Purchase this Solution
Solution Summary

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

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. ...

Purchase this Solution
Free BrainMass Quizzes
Motivation

This tests some key elements of major motivation theories.

Basics of corporate finance

These questions will test you on your knowledge of finance.

Lean your Process

This quiz will help you understand the basic concepts of Lean.

Managing the Older Worker

This quiz will let you know some of the basics of dealing with older workers. This is increasingly important for managers and human resource workers as many countries are facing an increase in older people in the workforce

Business Ethics Awareness Strategy

This quiz is designed to assess your current ability for determining the characteristics of ethical behavior. It is essential that leaders, managers, and employees are able to distinguish between positive and negative ethical behavior. The quicker you assess a person's ethical tendency, the awareness empowers you to develop a strategy on how to interact with them.

View More Free Quizzes
Related BrainMass Solutions

  • Comparing PPP and IFE

    166157 Comparing PPP and IFE How is it possible for PPP to hold if the IFE does not?

  • IFE Application to Asian Crisis

    According to purchasing power parity (PPP), the higher interest rate should result in a weaker currency because of the implied market expectations of high inflation. This posting helps with a question about IFE application to Asian Crisis.

  • PPP and IFE

    According to PPP, the Mexican peso should depreciate by the amount of the differential between U.S. and Mexican inflation rates. Using a 40 percent differential, the Mexican peso should depreciate by about 40 percent.

  • Global Finance Currency Questions

    (2) Since different countries have different types of exchange rates (i.e. floating vs. flexible), it's difficult to compare and forecast foreign exchange rates.

  • Spot rate

    (You may use the approximate formula to answer this question.) 1. According to PPP, the exchange rate of the pound will depreciate by 4.7 percent.

  • Purchasing Power Parity (PPP)

    Then, determine whether the exchange rate changes were similar to what would have been expected under PPP theory.

  • Global Finance

    a- Fluctuation b- International Forecasting Effect (IFE). c- Counter Trade. d- Purchasing Power Parity (PPP) e- Inflation Rate Parity (IRP). Answer 1: TRUE This is the definition of a futures contract.

  • Absolute and Relative PPP

    Measuring income in different countries using PPP exchange rates helps to avoid this problem. PPP exchange rates are especially useful when official exchange rates are artificially manipulated by governments.

  • International Financial Management

    According to PPP, what is the expected spot rate of the euro in one year? c. According to the IFE, what is the expected spot rate of the euro in one year? d. Reconcile your answers to parts (a). and (c).

View More Related Solutions