In this exercise you are asked to compare the current one-year forward rate for a chosen currency in the market with estimates of the future spot rate in one year using 1) the theory of purchasing power parity and 2) the theory of the international Fisher effect. First, choose a currency for which a one-year forward rate is available: Go to the http://markets.ft.com/ft/markets/currencies.asp At the bottom of the page under Data Archive and Currencies select the Dollar Sport Forward report and the most recent date available Select a currency for which a one year forward rate is available on the table. Enter this one-year forward rate, the closing mid-point spot rate and the date of the table below. 1. What is the current spot rate between your currency and the U.S. dollar? Currency Date Current Spot Rate (Closing Mid Point Rate) One Year Forward Rate Canada Dollar 3/5/15 1.2612 Using the theory of purchasing power parity and forecasts of expected inflation over the next year, forecast the spot exchange rate for the above for one year in the future. S2 = S1 where S1 = Current spot rate expressed in European terms S2 = Spot rate in one year expressed in European terms Sources of inflation data include http://stats.oecd.org/ for OECD countries and http://www.clevelandfed.org/research/Inflation/World-Inflation/ at the World Bank site. It is viewed important to be consistent in the definition and source of inflation numbers for the US and other economy that you use for the PPP equation. The most basic definitions of inflation are consumer price index (CPI), producer price index (PPI), and GDP deflator. Estimates of the next years inflation are preferred but it is also common to use the past years inflation as the best estimate of next years inflation. You are encouraged to share any useful websites for this data you find with the class on the course Bulletin Board. Future Spot Rate in One Year Discuss your sources and uses of data in arriving at the estimate above. 2. Using International Fisher and that the latest government bond rates are the most appropriate interest rates for applying International Fisher, forecast the spot exchange rate for the above for one year in the future. S2 = Sources of interest rate include http://stats.oecd.org/index.aspx?queryid=26668 for OECD countries, Economic Indicators for individual countries at http://elibrary-data.imf.org/FindDataReports.aspx?d=33120&e=170185 , and Interest Rates, List by Country at http://www.tradingeconomics.com/interest-rates-list-by-country. As before, it is important to be consistent in the definition and source of the data that you use for the equation. It is most common to use the one-year rate at which the US and other government borrows in this calculation. Future Spot Rate in One Year Discuss your sources and uses of data in arriving at the estimate above. Compare your two forecasts above with the current one-year forward rate for the currency found in number one above