What is the current spot rate between your currency and the U$.$S$.$ dollar?

Currency Date Current Spot Rate $($Closing Mid Point Rate$)$ One Year Forward Rate

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.

Where

$=$ Current spot rate expressed in European terms

$=$ Spot rate in one year expressed in European terms

Sources of inflation data include stats.oecd for OECD countries and clevelandfed.$/$research$/$Inflation$/$World$-$Inflation$/$ at the World Bank site. It is viewed important to be consistent in the definition and source of inflation numbers for the US and other economy that you use for the PPP equation. The most basic definitions of inflation are consumer price index $($CPI$),$ producer price index $($PPI$),$ and GDP deflator. Estimates of the next year$$s inflation are preferred but it is also common to use the past year$$s inflation as the best estimate of next year$$s inflation. You are encouraged to share any useful websites for this data you find with the class on the course Bulletin Board.

Future Spot Rate in One Year

Discuss your sources and uses of data in arriving at the estimate above.

Using International Fisher and that the latest government bond rates are the most appropriate interest rates for applying International Fisher, forecast the spot exchange rate for the above for one year in the future.

$=$

Sources of interest rate include stats.oecd for OECD countries, $$Economic Indicators$$ for individual countries at data.imf findDataReports.aspx?d$=33120$&e$=170185,$ and $$Interest Rates, List by Country$$ at tradingeconomics.com$/$interest$-$rates$-$list$-$by$-$country. As before, it is important to be consistent in the definition and source of the data that you use for the equation. It is most common to use the one$-$year rate at which the US and other government borrows in this calculation.

Future Spot Rate in One Year

Discuss your sources and uses of data in arriving at the estimate above.

Compare your two forecasts above with the current one$-$year forward rate for the currency found in number one above.