8.3 Exchange Rates - Systems and Calculations Flashcards
If the annual U.S. inflation rate is expected to be 3%, and the Ptomanian ptoma is expected to depreciate against the U.S. dollar by 12%, a Ptomanian firm importing from its U.S. parent can expect the ptoma costs of imports denominated in dollars to
A. Increase by about 17%.
B. Decrease by about 12%.
C. Increase by about 3%
D. Decrease by about 5%.
A. Increase by about 17%.
Inflation in the U.S. means that $1.03 now has the purchasing power formerly enjoyed by $1.00. The 12% depreciation of the ptoma means that its purchasing power in dollars has declined to 88%. Dividing the U.S. inflation factor of 1.03 by the new ptoma value of .88 and subtracting 1 results in a net loss of ptoma purchasing power against the dollar of 17.05%.
- The spot rate for one Australian dollar is US $0.92685 and the 60-day forward rate is US $0.93005. Which one of the following statements is consistent with these facts?
A. The U.S. dollar has gained purchasing power with respect to the Australian dollar.
B. The U.S. dollar is trading at a forward premium with respect to the Australian dollar.
C. The U.S. dollar is trading at a forward discount with respect to the Australian dollar.
D. The U.S. dollar has lost purchasing power with respect to the Australian dollar.
C. The U.S. dollar is trading at a forward discount with respect to the Australian dollar.
The exchange rate for the Australian dollar is higher in the forward market than the spot market; the Australian dollar is therefore trading at a forward premium. From this, it follows that the U.S. dollar is trading at a forward discount.
