Reference no: EM133291073
Case: Omni Advisors, an international pension fund manager, uses the concepts of purchasing power parity (PPP) and the International Fisher Effect (IFE) to forecast spot exchange rates. Omni gathers the financial information as follows:
Base price level 100, current price level 105, current south African price level 111, Base rand spot exchange rate $0.183, current rand spot exchange rate $0.166,
Expected annual U.S inflation 7%, expected annual South African inflation 5%,
Expected U.S. one year interest rate 10%, Expected South African one year interest rate 8%.
Question 1: What is the current ZAR spot rate in USD that would have been forecast by PPP ?
Question 2: Using the IFE, what is the expected ZAR spot rate in USD one year from now?
Question 3: Using PPP, the expected ZAR spot rate in USD four years from now.