,/SFr = 160/SFr. Problem 1 (Real exchange Rate and RPP percentage Changes): One year ago, the spot exchange rate between the Japanese yen and Swiss franc was S-1 Today, the spot rate is SqW/SFr = 155/SFr. During the year, inflation was p*= 2 percent and pSFr = 3 percent in Japan and Switzerland, respectively. (a) What was the percentage change in the nominal value of the Swiss franc? (b) One year ago, what nominal exchange rate would you have predicted today based on the differences in inflation rates? (c) What was the percentage change in the real exchange rate, X,X/SFr, during the year? 1. What was the percentage change in the relative purchasing power of the franc? 2. What was the percentage change in the relative purchasing power of the yen? Problem 2 [Forecasting expected spot exchange rates]: As of today, assume the following information is available: The U.S. The real annual rate of interest required by 2% investors Mexico 2% Annual Nominal interest rate 11% 15% Today in the spot market, one Mexican peso buys 0.20 dollars (SUSD/MXN = USD 0.20/MXN), and the one-year forward rate is $0.19 (FUSD/MXN = USD 0.19/MXN). (a) Use the forward rate to forecast the percentage change in the Mexican peso over the next year? What is the appreciation or depreciation of the MXN? (b) Use the differential in expected inflation to forecast the percentage change in the Mexican peso over the next year. What is the appreciation or depreciation of the USD? Dwblom 2 Intocrotine IDD and ICT. ,/SFr = 160/SFr. Problem 1 (Real exchange Rate and RPP percentage Changes): One year ago, the spot exchange rate between the Japanese yen and Swiss franc was S-1 Today, the spot rate is SqW/SFr = 155/SFr. During the year, inflation was p*= 2 percent and pSFr = 3 percent in Japan and Switzerland, respectively. (a) What was the percentage change in the nominal value of the Swiss franc? (b) One year ago, what nominal exchange rate would you have predicted today based on the differences in inflation rates? (c) What was the percentage change in the real exchange rate, X,X/SFr, during the year? 1. What was the percentage change in the relative purchasing power of the franc? 2. What was the percentage change in the relative purchasing power of the yen? Problem 2 [Forecasting expected spot exchange rates]: As of today, assume the following information is available: The U.S. The real annual rate of interest required by 2% investors Mexico 2% Annual Nominal interest rate 11% 15% Today in the spot market, one Mexican peso buys 0.20 dollars (SUSD/MXN = USD 0.20/MXN), and the one-year forward rate is $0.19 (FUSD/MXN = USD 0.19/MXN). (a) Use the forward rate to forecast the percentage change in the Mexican peso over the next year? What is the appreciation or depreciation of the MXN? (b) Use the differential in expected inflation to forecast the percentage change in the Mexican peso over the next year. What is the appreciation or depreciation of the USD? Dwblom 2 Intocrotine IDD and ICT
