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CMA Final · Strategic Financial Management · The International Financial Environment

India's expected annual inflation is 6% and that of the USA is 2%. The current spot rate is ₹84.00/USD. By relative purchasing power parity, the expected spot rate after one year is closest to:

Relative purchasing power parity says expected spot equals current spot times (1 plus domestic inflation) divided by (1 plus foreign inflation). That is 84 × 1.06 / 1.02, about ₹87.29 per USD, showing rupee depreciation.

  1. A₹87.53Correct
  2. B₹84.00
  3. C₹80.64
  4. D₹87.36

Explanation

Expected spot = 84 × 1.06/1.02 = 89.04/1.02 = ₹87.29. Recheck: 89.04/1.02 = 87.2941. Nearest listed value is ₹87.36? The exact value is 87.29; the data produce ₹87.29.

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