Us RFR 4.8 US Inf 2.3 Brazil RFR 8.8 Brazil Inf 6.3 spot exchange rate 2.3844 brazil per dollar Baroque expects the brazil currency to decline by 5% Which Relationship explains this Interest Rate Parity Purchasing Parity Uncovered Interest Parity The answer is C If there is the same differential between inflation rates and interest rates, like in above, don’t purchasing power parity and uncovered parity come up with the same E(s)? Can someone shed some light on this.
If PPP held, then the expected decline would have to match the inflation differential of 4%. But I agree that the problem is a little unusual, as typically UIP says that the market’s expected future spot rate is the current rate adjusted for the interest rate differential. In this problem, they invoked UIP to explain one investor’s idiosyncratic expectation. I was a little bothered by that.
PPP does hold. Uncovered interest rate parity did too. There explanation was PPP only showed a decline of 4% which is not 5%. So i’m like ok, i go and calculate UIRP and that is 4%. (there is like a a .002 difference in E(s))