GreenDigital is a multinational U.S.A. company that performs diverse activities. It manufactures electronic tools like hand-held digital electronic microscopes, digital multimeters, voltage testers etc.

To conduct this manufacturing, they import certain electronic components from countries like Japan and South Korea.

The markets for the manufactured tools are the U.S.A., Australia, Canada and United Kingdom (U.K). However, the majority of sales is in the U.K. Therefore, the company has already put up a subsidiary in the U.K. It resells and distributes the products to different businesses. The quarterly net profit after tax generated by the subsidiary is 500,000. The exports to Canada and Australia are to other independent distributing companies that buy the tools at wholesale prices from GreenDigital.

GreenDigital is also considering the construction of an electronic component manufacturing plant in the U.S.A. to eliminate the risks and costs associated with the current importing of electronic components from countries like Japan and South Korea.

GreenDigital already has sufficient manufacturing space available and only has to import manufacturing equipment of 63,000,000 Yen from Japan. The installation of the machinery will be conducted by local U.S.A. companies and will cost $1,000,000.

The Chief Executive Officer (CEO) of GreenDigital, requests the following information to assist him with determining the extent of exchange rate risk and the availability of funds to conduct the multinational transactions:

1. The CEO requires a forecast of the one-year and three-year exchange rates for the $/ calculated based on Purchasing Power Parity (PPP) and International Fisher Effect (IFE) with the following existing available information:

Current $/ spot exchange rate	$1.3075/
Expected annual U.S. inflation	1.23%
Expected annual British inflation	0.85%
Expected U.S. one-year interest rate	0.258%
Expected British one-year interest rate	0.106%

The CEO requires a forecast of the one year and three-year exchange rates for the $/ calculated based on Purchasing Power Parity (PPP) and International Fisher Effect (IFE).

Calculate the one year forward $/ exchange rate based on PPP in the space provided below: (2 marks)

Calculate the three-year forward $/ exchange rate based on PPP in the space provided below: (2 marks)

Calculate the one year forward $/ exchange rate based on IFE in the space provided below: (2 marks)

Calculate the three-year forward $/ exchange rate based on IFE in the space provided below: (2 marks)

Explain the conditions under which the forward exchange rates calculated by you will be unbiased predictors of the future spot exchange rate. Use the space provided below. (2 marks)