Question 1

**Section A**

Andean Copper, based in Chile, exports to the USA. The current spot exchange rate is 800 CLP/USD (Chilean Pesos per US Dollar). Annual inflation is expected to be 5% in Chile and 2% in the USA.

According to Purchasing Power Parity (PPP), what is the expected spot exchange rate in one year's time? (Round to two decimal places)

Accepted Answer

Use the PPP formula: S1 = S0 × [(1 + hc) / (1 + hb)], where hc is the inflation rate of the quote/counter currency (CLP) and hb is the inflation rate of the base currency (USD).

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Putting the base currency inflation in the numerator and the counter currency inflation in the denominator, resulting in 777.14.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FM — Financial Management Practice Exam 5

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