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svgleeson

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发表于 2011-7-13 15:23 | 只看该作者

Nominal vs Real Currency Calculations (my interpretation, please confirm)

expected, question, exchange, one
this question is from 2010 CFA sample exam, PM section

"compute the expected NOMINAL exchange at the end of one year"

the steps to compute the answer are:

1) given spot, price level ratio, we compute the real rate
2) multiply the REAL rate by US/UK inflation levels
3) this gives you the expected nominal exchange rate

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this question is from Schweser qbank

"compute the end of period real rate"

the steps to compute the answer are:
1) given one year ago spot, current spot, and price level ratio
2) multiply the end of period SPOT by the US/UK inflation levels

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Summary:

1) when asked to compute the NOMINAL, we compute the real and multiply by inflation

2) when asked to compute the REAL, we just multiply the (spot x inflation)

is that correct?
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2#
发表于 2011-7-13 15:23 | 只看该作者
Say you have a beginning nominal exchange rate of $2.00 / pound. Also, say the US price level is 2 and a UK price level is 1 and UK inflation is projected to be 1% and US inflation is projected to be 5%.

The expected nominal exchange rate can be found with the formula... E(S)=S * (Inflation counter / Inflation base)^T

So the expected nominal rate would be... 2.00 * (1.05/1.01) = $2.08 / pound. Notice that since the US had higher expected inflation, the $ depreciated relative to the pound.

Whereas, say instead that the nominal rate actually turned out to be $2.10 / pound, the real rate is given by... real S = S end * (price level begin * inflation foreign / price level begin * inflation domestic).

So the expected real rate would be... 2.1 * ([1*1.01]/[2*1.05]) = $1.01 / pound. Notice in this case had we calculated the original real rate it would have been 2.00 * (1/2) = $1.00 / pound. Which means there was real movement of 1%, which is due to the actual nominal rate of $2.10 being higher than the expected nominal rate of $2.08.

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