Question

Suppose the spot exchange rate for the Hungarian forint is HUF 215. Interest rates in the United States are 4.7 percent per year. They are 6.6 percent in Hungary.

Required:
What do you predict the exchange rate will be in one year? In two years? In five years?

Answer 1

The exchange rate in one year cannot be accurately predicted, but higher interest rates in Hungary would likely lead to an appreciation of the Hungarian forint. Various factors influence exchange rates, making exact predictions difficult.

Step-by-step explanation:

To predict the exchange rate in one year, you need to consider the interest rate differentials between the two countries. In this case, the interest rate in the United States is 4.7 percent, while it is 6.6 percent in Hungary. Since the interest rate in Hungary is higher, it will attract more foreign investors who will need to exchange their currency for Hungarian forints. This increased demand for the forint will lead to an appreciation in the exchange rate.

However, the exact exchange rate in one year cannot be determined as it depends on various other factors such as inflation, economic conditions, and market sentiment. It is important to note that exchange rates are influenced by multiple factors and can fluctuate.

Therefore, while we can expect the exchange rate to appreciate due to the higher interest rate in Hungary, it is not possible to accurately predict the specific exchange rate in one year, two years, or five years.