Skip to content

CMA Final · Strategic Financial Management · Foreign Exchange Market

Spot EUR/INR is 90.00. Expected annual inflation is 6% in India and 2% in the Euro area. Under relative purchasing power parity, what is the expected EUR/INR rate after one year (nearest paisa)?

Expected EUR/INR is about 93.53. Relative PPP scales the spot rate by the ratio of domestic to foreign inflation factors: 90 multiplied by 1.06 divided by 1.02. Using the simple 4% difference gives 93.60, which ignores the compounding effect.

  1. A93.53Correct
  2. B93.60
  3. C92.00
  4. D86.60

Explanation

Expected rate = 90 x 1.06/1.02 = 93.5294, about 93.53. The approximate 4% difference gives 93.60, which ignores compounding of inflation. Option 86.60 inverts the ratio and is wrong.

Did you get it right without looking?

One question tells you little. A timed set on Foreign Exchange Market shows your real accuracy, how long you take and where you lose marks.

Practise Foreign Exchange MarketFree diagnostic mock

More Foreign Exchange Market questions