Chance Co., the parent of a US-based MNC, uses fundamental forecasting to estimate future values of exchange rates. Suppose that Chance Co. believes that movements in the value of the British pound are dictated by the inflation rate differential between the pound and the U.S. dollar as stated by Purchasing Power Parity (PPP). Suppose that, over the coming year, inflation in the U.K. will be 2.00% and inflation in the U.S. will be 4.00% (according to government reports).

According to these figures, which of the following is closest to the percentage change in the British pound exchange rate, as predicted by PPP?

201.96%

1.96%

98.08%

-50.98%

Suppose the current spot rate of the pound is $1.00.

Given the percentage change in the spot rate (as predicted by PPP) that you just calculated, the predicted spot rate of the pound at the end of the year is approximately

$0.02

$1.02

$0.99

$0.98