International Financial Management Homework

1.

Consider the following data for the USA and India.

Exchange rate (current) = 45 INR/USD

One year forward rate = 47 INR/USD

One year forecasted rate = 48 INR/USD

Expected inflation rate for USA = 5%

Expected inflation rate for India = 8%

Nominal interest rate in USA = 7%

Nominal interest rate in India = 10%

A) check if the international parity conditions hold: UH, PPP, CIRP, CIRP, Fisher equation, Real interest rate parity.

B) If actual exchange rate a year later is 46 INR/USD, calculate the forecast error.

C) Is the use of the forward rate as a forecast better than the forecast made in this case? Comment.