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CMA Final · Strategic Financial Management · The International Financial Environment

Spot USD/INR is 83.00. India's expected annual inflation is 6% and the US expected annual inflation is 2%. Using relative purchasing power parity, the expected spot rate after one year is closest to:

Relative purchasing power parity says the currency of the higher-inflation country depreciates by the inflation differential. Multiplying 83 by 1.06/1.02 gives about ₹86.25, so the closest option is ₹86.21. Inverting the ratio would wrongly show the rupee appreciating.

  1. A₹86.21Correct
  2. B₹79.74
  3. C₹83.00
  4. D₹88.00

Explanation

Relative PPP: expected spot = 83 × (1.06/1.02) = 83 × 1.03922 = ₹86.25 approx. Computing precisely: 1.06/1.02 = 1.039216; 83 × 1.039216 = 86.255. Closest option is ₹86.21. The option ₹79.74 inverts the inflation ratio, a wrong-base mistake.

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