Posted: January 17th, 2016

What is relative PPP? Calculate the current pound spot rate in dollar that would have been forecast by PPP.

A fund manager uses the concepts of purchasing power parity (PPP) and the International Fisher Effect (IFE) to forecast spot exchange rates. He gathers the financial information as follows:
A year ago, the spot rate between pound and dollar was $1.60/£. In the past year, US inflation was 3.5% and UK inflation was 4.5%. The current spot rate is $1.576/£.
(Numbers should be rounded to 4 decimal places. Please note that your answers will be worthy zero mark if they do not include currency symbols $, £)

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