Question

On January 1, 1990, the annual inflation rates in the U.S. and Greece were expected to be 3% and 8%, respectively. If the current spot rate that day for the drachma was $.007, then the expected spot rate in three years was

Answer 1

$0.006072094

Step-by-step explanation:

Expected spot rate in three year ($/drachma) = Current spot rate * ( 1 + Inflation $)^3 / ( 1 + Inflation drachma)^3

= $0.007 * (1 + 3%)^3 / (1 + 8%)^3

= $0.007 * (1 + 0.03)^3 / (1 + 0.08)^3

= $0.007 * (1 .03)^3 / (1.08)^3

= $0.007 * 1.092727 / 1.259712

= $0.007 * 0.867442

= $0.006072094