Expected spot rate of the australian dollar in one year, Finance Basics

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Expected spot rate of the australian dollar in one year

Problem:

You believe that the future value of the Australian dollar will be determined by purchasing power parity (PPP). You expect that inflation in Australia will be 6% next year, while inflation in the U.S. will be 2% next year. Today the spot rate of the Australian dollar is $.81, and the one-year forward rate is $.77.

Required:

Question: What is the expected spot rate of the Australian dollar in one year?

Note: Explain all calculation and formulas.

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Finance Basics: Expected spot rate of the australian dollar in one year

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Finance Basics: Expected spot rate of the australian dollar in one year

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