CMA Final · Strategic Financial Management · The International Financial Environment
Spot USD/INR is 83.00. India's expected annual inflation is 6% and the United States' expected annual inflation is 2%. Using relative purchasing power parity, the expected spot rate after one year is closest to:
Under relative PPP the rupee depreciates by the inflation differential, so the expected spot is 83 multiplied by 1.06/1.02, which is about Rs 86.26 per USD. The higher Indian inflation weakens the rupee against the dollar.
- ARs 79.85 per USD
- BRs 83.00 per USD
- CRs 86.26 per USDCorrect
- DRs 88.00 per USD
Explanation
Relative PPP: expected spot = 83 x (1.06/1.02) = 83 x 1.039216 = 86.255, about Rs 86.26. Option 79.85 inverts the inflation ratio. Option 88.00 adds the 4% difference... actually it adds 6% to the spot instead of using the ratio, so it ignores US inflation.
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