i am getting myself confused here on a (simple) topic. an US based portfolio manager sees a quote of :Pound Sterling of 1.724. US Inflation is 4.75%, Uk inflation is 1.25%. Price levels (US:UK) 1.5:1. Q: what is the real exchange rate and the expected exchange rate one year from now? As I read it, :UK from the american investor point of view is an indirect quote, i.e 1 dollar will buy UK 1.724. (see, for example Vol 1 p 635). As US inflation is higher than UK inflation, we should expect the dollar to weaken (and therefore the UK pound should strengthen). This is approximated by : Inflation 4.75%-1.25% = 3.5% weakening of the . BUT the answer given of :pound is 1.784 - ie More pounds are needed to buy a dollar, which means the dollar has got stronger. I just dont get it. Surely the quote should have been (pound:) - ie it costs 1.724 dollars to buy 1 pound? Anyone got any pearly words of wisdom?
its /pound ....that means per pound or i pound is eqiavalent to 1.724 ...understand d difference between /pound and $:pound…hope that helps…
This confused me too. Why would they even write a question using a fraction? However, when doing problems where you calculate a cross rate, putting them into fraction form makes them a hundred times easier.
WTF??? i didnt even SEE the “/” sign. I mean, #$%%%$$$!!!. @ chandi: thanks for the repsonse, much appreciated. @ nielsendc: i feel your pain dude.