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Purchasing Power Parity

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If US prices are expected to rise by 3% over the coming year and prices in France are expected to rise by 7 % during the same time, what is the expected spot rate in one year of the French franc given that the current spot exchange rate US $0.168.

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Solution Summary

Using Purchasing Power Parity condition the forward rate is calculated, given the spot rate and the inflation in two countries (US and France).

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Purchasing Power Parity condition
Forward rate ( or expected spot rate in 1 yr) / Current Spot rate = ( 1+ US ...

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