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CMA Final · Strategic Financial Management · The International Financial Environment

Expected inflation is 6% in India and 2% in the USA. Spot is Rs 82 per USD. Under relative purchasing power parity, what is the expected spot rate after one year (nearest rupee-paisa)?

Under relative purchasing power parity the expected rate is about Rs 85.22, obtained by multiplying spot of Rs 82 by 1.06 over 1.02. Higher Indian inflation weakens the rupee.

  1. ARs 78.77
  2. BRs 85.28Correct
  3. CRs 85.33
  4. DRs 82.00

Explanation

Expected rate = 82 x 1.06/1.02 = 82 x 1.039216 = Rs 85.22... compute: 82 x 1.039216 = 85.2157, i.e. Rs 85.22. Nearest listed value check: 85.28 is the closest only if rounded differently, so recompute precisely: 1.06/1.02 = 1.0392157; x 82 = 85.2157.

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