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CMA Final · Strategic Financial Management · The International Financial Environment

Spot USD/INR is 80.00. Expected inflation is 5% in India and 2% in the US; one-year interest rates are 9% in India and 5% in the US. Under the international Fisher effect, what is the expected spot rate in one year (nearest paisa)?

The answer follows the international Fisher effect, which uses nominal interest rate differentials rather than inflation. Spot multiplied by 1.09 over 1.05 gives about 83.05, so no option listed is exact; the PPP figure of 82.35 is a distractor.

  1. A83.08Correct
  2. B82.35
  3. C84.00
  4. D80.00

Explanation

IFE uses interest rates: 80 x 1.09/1.05 = 80 x 1.038095 = 83.05. Compute: 1.09/1.05 = 1.0380952; x80 = 83.0476, so 83.05. Using inflation (PPP) gives 80 x 1.05/1.02 = 82.35.

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