IAI Actuarial Core Principles · Business Economics · Globalisation and multinational business
The spot rate is Rs 80 per US dollar. Over the next year, inflation is expected to be 6% in India and 2% in the USA. According to relative purchasing power parity, the expected spot rate in one year is closest to:
The expected spot rate is about Rs 83.1 per dollar. Under relative purchasing power parity, the rate moves by the ratio of inflation factors, 80 × 1.06 / 1.02, so higher Indian inflation leads to a depreciating rupee.
- ARs 76.9 per dollar
- BRs 77.0 per dollar
- CRs 83.1 per dollarCorrect
- DRs 84.8 per dollar
- Rs 80.0 per dollar
Explanation
Expected rate = 80 × 1.06 / 1.02 = 80 × 1.03922 = Rs 83.14. Higher Indian inflation implies rupee depreciation. Rs 76.9 results from inverting the ratio, which is the wrong direction. Rs 84.8 applies 6% alone, ignoring US inflation.
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