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CMA Final · Strategic Financial Management · Foreign Exchange Market

The spot rate is Rs 80/USD. Expected inflation is 6% in India and 2% in the US for the coming year. Using relative purchasing power parity, the expected spot rate after one year is closest to:

Under relative purchasing power parity the rupee depreciates by the inflation ratio: 80 × 1.06/1.02 ≈ Rs 83.14 per USD. The approximate 4% adjustment gives 83.20, but the exact ratio method gives 83.14.

  1. ARs 83.14Correct
  2. BRs 80.00
  3. CRs 83.20
  4. DRs 76.99

Explanation

Expected spot = 80 × 1.06/1.02 = 80 × 1.039216 = 83.137, about Rs 83.14. Rs 83.20 uses the approximation 80 × 1.04, which is not the exact relative PPP. Rs 76.99 inverts the ratio, and Rs 80 ignores inflation differentials.

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