orward rates. Your company has posted you on a 27-month overseas assignment in Budapest, Hungary. You will be living on the Buda side of the river, but will be spending much of your time on the Pest side. The current indirect rate for the Hungarian forint is 188.13 forints per U.S. dollar. If the anticipated inflation rate in the United States is 2.8% and the anticipated inflation rate in Hungary is 6.9% (annually), what exchange rate do you anticipate at the end of your assignment? What exchange rate do you anticipate at the end of your assignment?

The purchasing power parity theory states the future spot rate and and he current spot exchange rate between two currencies can be linked to the relative inflation rate between the two currencies. This also known as the law of one price.

The model is given as follows:

S = So× (1+Fc)/(1+Fh)

Fc - inflation rate in Hungary - 6.9%

Fh- Inflation rate in the US- 2.8%

S- Future spot rate- ?

So- Current spot rate-188.13

Expected exchange rate one year from now

118.13× (1.069)/(1.028)

=122.8414

= 122.84 Hungarian Forint

$1 = 122.84 Hungarian Forint