On January 1, 1985, the annual inflation rates in the U

Finance Dec 24, 2020

On January 1, 1985, the annual inflation rates in the U.S. and France were expected to be 4% and 6%, respectively. If the current spot rate that day was $.1250, then the expected spot rate in two years would have been: (provide only the final answer)

Expert Solution

Expected spot rate in 2 years= (Current spot rate ((1+interest rate in foreign country)/(1+interest rate in domestic country))^2)

= (.1250((1.04)/(1.06)^2)

= $.12032

Hence the correct answer will be $.12032

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