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You believe that the future value of the Australian dollar will be determined by purchasing power parity (PPP). You expect that inflation in Australia will be 6 percent next year, while inflation in the United States will be 1 percent next year. Today the spot rate of the Australian dollar is $0.78, and the one-year forward rate is $0.73. What is the expected spot rate of the Australian dollar in one year

Respuesta :

Answer:

The expected spot rate of the Australian dollar in one year = 1.28 AUD per USD

Explanation:

The Current spot rate of Australian dollar against US Dollar

= [tex]\frac{1}{0.81}[/tex] AUD /USD

[tex]= 1.234[/tex] AUD per USD.

Inflation rate in Australia [tex]= 6[/tex]%

Inflation in the US [tex]= 2[/tex]%

Percentage change in Australian currency

[tex]=\frac{(1+0.06)}{(1+0.02)} -1[/tex]

[tex]=0.039 = 3.9[/tex] %

Thus, the spot exchange rate of AUD 1 year from now will be

[tex](1+0.039)*1.23 = 1.28[/tex]AUD per USD.

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