Hi,
I am on eoc for Cap market exp eoc # 19. I just do not understand it. q is copied:
[question removed by moderator]
A. current exchange rate if PPP prevails must reflect an inflation differential
Switz
CPI = (150/100) -1 = 1,5 -1 = 0,5
Fap
CPI = (140/100) = 1,4 - 1 = 0,4
Differential = 0,5 - 0,4 = 0,1
Fip/Chf 10 Y Ago = 3 Fips per 1 CHF
According to PPP should be = Spot (CPI A / CPI B) = 3 (1,4/1,5) = 2,8 Fip/CHF
B) Since current exch. rate is 2 Fip/Chf, Fips are overvalued.