# Arbitrage and PPP Assume that locational arbitrage ensures that spot exchange rates are properly aligned. Also assume that you believe in purchasing power parity. The spot rate of the British pound is \$1.80. The spot rate of the Swiss franc is Â£0.3. You expect the one-year inflation rate to be 7 percent in the United Kingdom, 5 percent in Switzerland, and 1 percent in the United States. The actual one-year interest rate is 6 percent in the United Kingdom, 2 percent in Switzerland, and 4 percent in the United States. What is your expected spot rate of the Swiss franc in one year with respect to the U.S. dollar? Show your work.

FindFind

### International Financial Management

14th Edition
Publisher: Cengage
ISBN: 9780357130698
FindFind

### International Financial Management

14th Edition
Publisher: Cengage
ISBN: 9780357130698

#### Solutions

Chapter 8, Problem 32QA
Textbook Problem

## Arbitrage and PPP Assume that locational arbitrage ensures that spot exchange rates are properly aligned. Also assume that you believe in purchasing power parity. The spot rate of the British pound is \$1.80. The spot rate of the Swiss franc is Â£0.3. You expect the one-year inflation rate to be 7 percent in the United Kingdom, 5 percent in Switzerland, and 1 percent in the United States. The actual one-year interest rate is 6 percent in the United Kingdom, 2 percent in Switzerland, and 4 percent in the United States. What is your expected spot rate of the Swiss franc in one year with respect to the U.S. dollar? Show your work.

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