Question
Colossal Corporation is a U.S. MNE considering projects in the U.K. over the next five years. They are concerned about the exchange rate between the
Colossal Corporation is a U.S. MNE considering projects in the U.K. over the next five years. They are concerned about the exchange rate between the USD and the GBP during that period, and wish to forecast the exchange rate assuming that relative PPP holds between the U.S. and the U.K. The spot rate between the USD and GBP today is 0.6410/$ . Given the annual inflation forecasts for the U.S. and U.K. in the table below, what are the expected spot rates (in GBP per USD) at the end of years 1, 2 and 3?
Year Expected U.S inflation Expected U.K. inflation
1 1.5% 5.0%
2 1.5% 4.5%
3 2.0% 4.5%
A.
0.6631, 0.6827, 0.7131
B.
0.6827, 0.6994, 0.7131
C.
0.6631, 0.6827, 0.6994
D.
0.6994, 0.7131, 0.7201
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