Question

Suppose the spot exchange rate for the Hungarian forint is HUF 238. Interest rates in the United States are 4.1 percent per year. They are 3.6 percent in Hungary. What do you predict the exchange rate will be in three years?

HUF 234.45
HUF 236.90
HUF 241.59
HUF 236.81
HUF 239.19

Answer 1

To predict the future exchange rate between the Hungarian forint and U.S. dollar, the International Fisher Effect can be applied using the current exchange rate, the interest rates in both countries, and the forecast period in years.

Step-by-step explanation:

The question from the student involves predicting the exchange rate in three years' time based on current spot exchange rates and interest rates in the United States and Hungary. To calculate the predicted exchange rate, you can use the International Fisher Effect (IFE), which assumes that the real interest rates are equal across different countries and that the expected inflation rates are reflected in the nominal interest rates.

The equation takes into account the current exchange rate, the interest rates in both countries, and the number of years for the prediction.

Using the formula, incorporating the U.S. interest rate of 4.1% and the Hungarian interest rate of 3.6%, along with the current spot exchange rate of HUF 238 and the time period of three years, allows us to predict the future exchange rate.