Question

Assume the spot exchange rate for the Hungarian forint is 267.767 HUF. Also assume the inflation rate in the United States is 1.6 percent per year while it is 3.5 percent in Hungary. What is the expected exchange rate three years from now

Answer 1

Answer: 283.322 HUF

Explanation:

Following the information given in the question, the following can be deduced:

Spot rate = 267.767

Foreign currency interest rate (rf) = 1.6%

Home currency interest rate (rh) = 3.5%

Number of years (n) = 3

Therefore, the expected exchange rate 3 years from now will be calculated as:

= Spot × (1+(rh - rf))^n

= 267.767 × [1 + (35% - 16%)]³

= 267.767 × [1 + (0.035 - 0.016)]³

= 267.767 × 1.0581

= 283.322 HUF

Therefore, the expected exchange rate 3 years from now will be 283.322 HUF.