Principles of Corporate Finance

Exchange Rate Relationships

foreign/$

foreign/$

$

foreign = )

1 +i

1 +i

S

E(s

Example - If inflation in the US is forecasted at
2.0% this year and Japan is forecasted to fall
2.5%, what do we know about the expected spot
rate?
Given a spot rate of 112.645yen:$1

112.645

= E(s )

1 +.02

1 - .025 foreign/$