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CMA Final · Strategic Financial Management · Foreign Exchange Market

Spot USD/INR is 83.00. Inflation expected over the next year is 6% in India and 2% in the US. As per relative purchasing power parity, the expected spot rate after one year is approximately:

Relative PPP gives expected spot = 83 x 1.06/1.02, about 86.25, meaning the rupee depreciates because Indian inflation is higher than US inflation.

  1. A79.74
  2. B86.32Correct
  3. C87.15
  4. D83.00

Explanation

Expected spot = 83 x (1.06/1.02) = 83 x 1.039216 = 86.25. The listed 86.32 is not exact, so the key is flawed.

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