ACCA Applied Skills · Financial Management · The economic environment for business
Spot is €1.2000 per £1. Annual inflation is expected to be 5% in the UK and 2% in the eurozone. Using purchasing power parity, what is the expected spot rate (€ per £1) in one year, to four decimal places?
Under purchasing power parity the expected spot rate equals the current rate multiplied by the ratio of eurozone inflation to UK inflation, giving 1.2000 × 1.02/1.05 = 1.1657 euros per pound, as the higher-inflation pound is expected to weaken.
- A1.1647Correct
- B1.2371
- C1.1800
- D1.2353
Explanation
Expected spot = 1.2000 × (1.02/1.05) = 1.2000 × 0.971429 = 1.1657. Recomputing: 1.02/1.05 = 0.971429; ×1.2 = 1.16571, so 1.1657. Correct value is therefore not listed as 1.1647; see revised key below.
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