Question 14

1. A basket of goods sells Sfr2, 000 in Switzerland when the same basket of goods sells for 1,000 in the UK. The current exchange rate is SFr2.0/. Ove the forthcoming year inflation is estimated to be 2% in Switzerland and 4% in the UK.

If the purchasing power parity theory holds, what will the exchange rate be at the end of the year?

2. The rate of interest available on a one-year government bond in Canada is 5%. A similarrisk bond in Australia yield 7%. The current spot rate is C$1.02/A$ (3 marks)

What will be the one-year forward rate if the market obeys the interest rate parity theory?