International Finance - International Parity condition - Expected exchange rate
Consider the following financial data:
Inflation (expected annual) 10% 4%
1 Year Interest Rate 12% ??
Spot Exchange Rate (DM/pound) 3
Assuming the international parity conditions hold perfectly, what is the expected exchange rate in one year?© SolutionLibrary Inc. solutionlibary.com 9836dcf9d7 https://solutionlibrary.com/business/finance/international-finance-international-parity-condition-expected-exchange-rate-317
...c being that real rate of interest should be same across currencies).
Thus interest rate for DM= 10%-4%= 6%
The exact formula above gives 5.89%.
F DM/£ / S DM/£ = (1+ r DM ) / (1+ r £) = (1+ i GER ) / (1+ i UK )
= (1.0589)/ (1.12) = 0.9454
You have not given the current spot rate for DM/ £
Assuming it is 3 DM get you a £ now.
After a year for each £ you will get 0.9454 X 3= 2.8362 DM
This results form the fact that if international ...