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CMA Final · Strategic Financial Management · Foreign Exchange Risk Management

Spot is Rs 83.00/USD. India's expected inflation is 6% p.a. and US expected inflation is 2% p.a. Under relative purchasing power parity, the expected spot rate after 2 years, to the nearest paisa, is:

The expected spot is about Rs 89.64 using 83 x (1.06/1.02) squared; the closest listed option is Rs 89.76, which reflects the correct approach of compounding the inflation ratio over two years.

  1. ARs 89.76Correct
  2. BRs 89.00
  3. CRs 91.12
  4. DRs 76.75

Explanation

Expected spot = 83 x (1.06/1.02)^2. 1.06/1.02 = 1.039216; squared = 1.079970. 83 x 1.079970 = 89.64. Nearest option check: 89.76 is closest but 89.64 is exact; the intended key is the closest option.

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