Skip to content

CMA Final · Strategic Financial Management · The International Financial Environment

India's annual inflation is expected to be 6% and US inflation 2%. The current spot rate is Rs 80/USD. Using relative purchasing power parity, what is the expected spot rate after one year (nearest rupee-paise)?

Relative purchasing power parity gives expected spot as current spot multiplied by the ratio of one plus domestic inflation to one plus foreign inflation. So 80 x 1.06/1.02 equals about Rs 83.14 per dollar, reflecting rupee depreciation due to higher Indian inflation.

  1. ARs 83.14Correct
  2. BRs 76.92
  3. CRs 84.00
  4. DRs 83.20

Explanation

Expected spot = 80 x 1.06 / 1.02 = 84.80 / 1.02 = 83.137, i.e. Rs 83.14. Rs 84.00 wrongly subtracts the inflation differential by simple addition (4% of 80 = 3.20 gives 83.20 is the approximation, not exact). Rs 83.20 is that approximation. Rs 76.92 inverts the ratio.

Did you get it right without looking?

One question tells you little. A timed set on The International Financial Environment shows your real accuracy, how long you take and where you lose marks.

Practise The International Financial EnvironmentFree diagnostic mock

More The International Financial Environment questions