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1. PPP
2. IFE
(chatgpt):
To calculate the expected amount of dollars to be paid, we can follow these steps:
Step 1: Adjust the spot rate based on inflation differentials. Adjusted spot rate = Spot rate * (1 +
Foreign inflation) / (1 + Domestic inflation) Adjusted spot rate = $0.10 * (1 + 0.03) / (1 + 0.07)
Adjusted spot rate = $0.10 * 1.03 / 1.07 Adjusted spot rate = $0.097
Step 2: Calculate the expected amount of dollars. Expected amount of dollars = Amount of Mexican
pesos * Adjusted spot rate Expected amount of dollars = 20,000,000 * $0.097 Expected amount of
dollars = $1,940,000
Therefore, Wake Forest Co. is expected to pay approximately $1,940,000 in dollars for importing 20
million Mexican pesos in one year, considering purchasing power parity and the expected inflation
rates of both countries.
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From the calculation, mean of forecasted error is lower for pound (1.63%) as compared to yen's
3.34%. Hence, pound was forecasted with greater accuracy.
To calculate the forward rate, we can use the interest rate parity formula:
Forward rate = Spot rate * (1 + Foreign interest rate) / (1 + Domestic interest rate)
In this case, the domestic interest rate refers to the interest rate of the United States, and the foreign
interest rate refers to the interest rate of Singapore.
Forward rate = $0.60 * (1 + 0.06) / (1 + 0.09) Forward rate = $0.60 * 1.06 / 1.09 Forward rate = $0.60 *
0.972
The forecast for the Singapore dollar's spot rate in four years using the forward rate is approximately
$0.5832.
To calculate the percentage appreciation or depreciation implied by this forecast over the four-year
period, we need to compare the forecasted spot rate with the initial spot rate.
Percentage change = (Forecasted spot rate - Initial spot rate) / Initial spot rate * 100
Percentage change = ($0.5832 - $0.60) / $0.60 * 100 Percentage change = (-$0.0168) / $0.60 * 100
Percentage change = -2.8%
Therefore, the forecast implies a depreciation of approximately 2.8% in the Singapore dollar's spot
rate over the four-year period.
6. Forward rate forecast: Assume that you obtain a quote for a one-year forward rate on the
Argentinian peso. Assume that Argentina’s one-year interest rate is 50 percent, while the U.S. oneyear interest rate is 10 percent. Over the next year, the peso depreciates by 25 percent. Do you think
the forward rate overestimated the spot rate one year ahead in this case? Explain
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Chap 10: