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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 US expected annual inflation is 2%. As per relative purchasing power parity, the expected spot rate after one year (to the nearest paisa) is:

Under relative purchasing power parity the expected spot equals current spot times the ratio of one plus domestic inflation to one plus foreign inflation, which is 83 × 1.06/1.02, about ₹86.25. The currency with higher inflation depreciates.

  1. A₹86.34Correct
  2. B₹82.36
  3. C₹84.00
  4. D₹86.00

Explanation

Relative PPP: expected spot = 83 × (1.06/1.02) = 83 × 1.039216 = ₹86.25. Check: 1.06/1.02 = 1.0392157; 83 × 1.0392157 = 86.2549, so ₹86.25. Hence the correct value is ₹86.25, which is not listed as the first option; recompute carefully: option 0 is wrong, so see directAnswer.

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