Skip to content

CMA Final · Strategic Financial Management · The International Financial Environment

Spot USD/INR is 83.00. India's annual inflation is expected at 6% and US inflation at 3%. Using relative purchasing power parity, what is the expected spot rate after one year (nearest paisa)?

The expected rate is about 85.42 per dollar. Under relative purchasing power parity the rupee depreciates by the inflation ratio, so the spot is multiplied by 1.06 divided by 1.03. Inverting the ratio would wrongly show appreciation.

  1. A85.42Correct
  2. B80.58
  3. C84.00
  4. D86.49

Explanation

Expected spot = 83 x (1.06/1.03) = 83 x 1.029126 = 85.42. Option 80.58 inverts the ratio (83 x 1.03/1.06). Option 84.00 simply adds the 1% difference in an approximate way, and 86.49 adds the full 6% only.

Did you get it right without looking?

One question tells you little. A timed set on The International Financial Environment shows your real accuracy, how long you take and where you lose marks.

Practise The International Financial EnvironmentFree diagnostic mock

More The International Financial Environment questions