Chapter 8: Purchasing Power Parity (PPP)

This template helps students in calculating changes in exchange rate using PPP.
This template is also useful in forecasting future spot rate based on the existing spot rate.
Students need to enter the required information in the input screen (green shaded cells).
Output is automatically updated as information in the input screen is changed.

Input Screen
Currency of foreign country Australian Dollar
Inflation rate in foreign country (If) 3.00%
Inflation rate in home country (Ih) 5.00%
Spot rate (S0) -Dollars per unit of foreign currency $1.0000

Output Screen
Adjustments in foreign currency exchange rate (e f)=[(1+ Ih)/(1+ If)]-1 1.9417%
Future spot rate (St) = S0(1+ef) $1.0194
Chapter 8: Purchasing Power Parity (PPP) Problems

This template helps students in calculating changes in exchange rate using PPP.
This template is also useful in forecasting future spot rate based on the existing spot rate.
Students need to enter the required information in the input screen (green shaded cells).
Output is automatically updated as information in the input screen is changed.

Please change inflation rates (item 1a and item 2a) in the input screen, in order to see the impact of the inflation rate differentia

Input Screen
Currency of foreign country British Pound
1. Inflation rate in foreign country (I f) 7.00%
2. Inflation rate in home country (Ih) 2.00%
1a. New inflation rate in foreign country (I f) 7.00% To see the imapct of inflation rate differential, Item 2
2a. New inflation rate in home country (I h) 2.00% minus item 1a cannot be equal to item 2 minus item
Spot rate (S0) -Dollars per unit of foreign currency $1.7300

Conclusion:
You are not interested to see the impact of inflation rate differential on the future spot rate.

Output Screen as per values in item

1&2 1a & 2a
Adjustments in exchange rate (ef)=[(1+ Ih)/(1+ If)]-1 -4.6729% -4.6729%
Future spot rate (St) = S0(1+ef) $1.6492 $1.6492
t of the inflation rate differential.

ation rate differential, Item 2a

e equal to item 2 minus item 1.
Chapter 8: International Fisher Effect (IFE)

This template helps students in calculating changes in exchange rate using IFE.
This template is also useful in forecasting future spot rate based on the existing spot rate.
Students need to enter the required information in the input screen (green shaded cells).
Output is automatically updated as information in the input screen is changed.

Input Screen
Currency of foreign country Australian Dollar
Interest rate in foreign country (if) 12.00%
Interest rate in home country (ih) 11.00%
Spot rate (S0) -Dollars per unit of foreign currency $1.0000

Output Screen
Adjustments in foreign currency exchange rate (e f)=[(1+ ih)/(1+ if)]-1 -0.8929%
Future spot rate (St) = S0(1+ef) $0.9911
Chapter 8: IFE Problem

This template helps students in calculating changes in exchange rate using IFE.
This template is also useful in forecasting future spot rate based on the existing spot rate.
Students need to enter the required information in the input screen (green shaded cells).
Output is automatically updated as information in the input screen is changed.

Please change interest rates (item 1a and item 2a) in the input screen, in order to see the impact of the interest rate differentia

Input Screen
Currency of foreign country Singapore Dollar
1. Interest rate in foreign country (if) 7.00%
2. Interest rate in home country (ih) 11.00%
1a. New interest rate in foreign country (if) 7.00%
2a. New interest rate in home country (ih) 12.00%
Spot rate (S) -Dollars per unit of foreign currency $0.7000

Conclusion:
The spot rate of the Singapore dollar would be expected to apppreciate
to a greater degree based on larger interest rate differentials.

Output Screen as per values in item

1&2 1a & 2a
Adjustments in exchange rate (ef)=[(1+ ih)/(1+ if)]-1 3.7383% 4.6729%
Future spot rate (St) = S0(1+ef) $0.7262 $0.7327
mpact of the interest rate differential.