Question B

3. (6 points) James Smith, an international fund manager, uses the concepts of purchasing power parity (PPP) and the International Fisher Effect (IFE) to forecast spot exchange rates. James gathers the financial information as follows: Current rand spot exchange rate $0.188 Expected annual U.S. inflation 8% Expected annual South African inflation 6% Expected U.S. one-year interest rate Expected South African one-year interest rate 0.08% Calculate the following exchange rates (ZAR and USD refer to the South African rand and U.S. dollar, respectively). a. Using the IFE, the expected ZAR spot rate in USD one year from now. (2 point) b. Using PPP, the expected ZAR spot rate in USD one year from now. (2 point) c. Using IRP (interest rate parity), the one year ZAR forward rate in USD. (2 point) 1% ANS: Please label a/b in your response to the two sub-questions respectively