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CFA Level 2
Economics

Impact of Inflation on Currency Exchange Rate Using IFE

Medium Currency Exchange Rates Parity Conditions

Consider the following scenario: A U.S. investor is analyzing two countries, Country A and Country B, both of which have different inflation rates. The current spot exchange rate between the U.S. dollar (USD) and the currency of Country A (C_A) is 1.2. The annual inflation rate in the U.S. is 2%, while in Country A, it is 5%. According to the International Fisher Effect, what exchange rate would be expected between the U.S. dollar and Country A’s currency in one year if the current rate holds?

Hint

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% Correct72%