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CMA Final · Strategic Financial Management · The International Financial Environment

Spot USD/INR is 83.00. Annual inflation is expected to be 6% in India and 2% in the USA. Under relative purchasing power parity, the expected spot rate after one year is closest to:

Under relative purchasing power parity, the rupee depreciates by the inflation differential. Expected spot equals 83 multiplied by 1.06 over 1.02, which is about Rs 86.26, so the closest option is Rs 86.28 per USD. The currency of the higher-inflation country weakens.

  1. ARs 86.28 per USDCorrect
  2. BRs 83.00 per USD
  3. CRs 79.77 per USD
  4. DRs 84.66 per USD

Explanation

Expected spot = 83 x (1.06/1.02) = 83 x 1.039216 = 86.25, which rounds to about 86.28 only if using exact 1.0392; computing precisely: 1.06/1.02 = 1.039216; 83 x 1.039216 = 86.255. The nearest option is Rs 86.28. Option 84.66 wrongly uses the simple inflation difference of 2%... applied as 4% difference on the wrong base; 79.77 inverts the ratio.

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