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 1+ Expected (Annual Foreign Inflation)1+ Expected (Annual US Inflation)

Or

where S₁ = Current spot rate expressed in European terms S₂ = Spot rate in one year expressed in European terms

^$ = Annual US Inflation Rate (use 1.8%)

= Annual Foreign Inflation Rate

Utilize the following data:

S₁ = Current spot rate in one year expressed in European terms from above.

Foreign Countrys Inflation rate: Here you are to use the GDP deflator (annual %) from MNE Part I worksheet.

US Inflation, GDP deflator (annual %) of 1.8%.

Australian Inflation = 2.8%

Ugandan Inflation = 2.5%

1 Australian dollar = 0.635 USD

1 USD = 1.57 Australian dollars

1 Ugandan Schilling = 0.00027 USD

1 USD = 3771.63 Ugandan Schilling

In the space below, Show your calculations in the box below for Country A and Country B. And respond to the questions posed in each section.

Be Sure to Convert % (Percentages) to decimals in your calculations!!

Country A: Australia

Future Spot Rate in One Year Based on Estimated Inflation Rates

For full and complete credit, show the initial equation (i.e. formula) and identify each variable and the value for each variable in the equation. Do not provide just the final answer

Country B: Uganda

Future Spot Rate in One Year Based on Estimated Inflation Rates

For full and complete credit, show the initial equation (i.e. formula) and identify each variable and the value for each variable in the equation. Do not provide just the final answer.