Question
a) With the coronavirus pandemic now in decline, overseas holidays are once again returning. One year from now you plan to spend one month at
a) With the coronavirus pandemic now in decline, overseas holidays are once again returning. One year from now you plan to spend one month at the luxurious yet remote Klunkung Hotel in Bali,Indonesia. The current charge for an all inclusive suite us Rps 28,800 per night. At the present exchange rate of Rps 36/USD this works out to USD 800. The Hotel informs you that next year's charges will increase the Indonesian inflation, which you expect to be 16%. UK inflation is currently 4% per annum. If the theory of purchasing power parity(PPP) holds, how much USD will you need one year hence to pay for your 30 day vacation?
b) Last night the spot market closing rate for GBP was EUR 1.3451. Annualized money market interest rates are currently 1.00% (USA) and 3,25% (Eurozone). Assuming Interest Rate Parity holds, what will be the 360-day, 180-day and 90-day forward rates, ceteris paribus?
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