Question 1

Section A

A multinational firm is evaluating cash flows from a fictional emerging market, 'Zandia'. The current spot exchange rate is 15.00 Zandian Dollars (ZD) to 1 US Dollar ($). Annual inflation in Zandia is expected to be 12%, while US inflation is expected to be 3%.

According to Purchasing Power Parity (PPP), what is the expected exchange rate (ZD per $) in exactly one year? (Round to two decimal places)

Accepted Answer

Use the Purchasing Power Parity formula: S1 = S0 * [(1 + hc) / (1 + hb)], where hc is the inflation rate of the counter currency (Zandia) and hb is the inflation rate of the base currency (US).

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Putting the US inflation rate in the numerator and Zandian inflation in the denominator, resulting in an appreciation of the ZD.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FM — Financial Management Practice Exam 6

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