Abstract
This report explains which currency is expected to appreciate and by what annual percentage and, according to Purchasing Power Parity, which country should have higher inflation. The assignment describes the accounts of balance of Payments and how this balance can help determine exchange rates. We also try to explain the difference between Transaction Exposure and Operating Exposure and the different methods that multinational firms use to bring back their profits from foreign countries. Extract: "According to Purchasing Power Parity, which country should have higher inflation? According to the Purchasing Power Parity, when there is more inflation in a country, its currency will go down. In our case, we want the Euro to go down in order to have parity. For example, if we assume that the exchange rate is $1/Euro and that US inflation is 2% and Europe inflation is 0%, we know that the $ is depreciated by 2%, which make an exchange rate of $1.02/Euro. In our case, the $ is expected to appreciate, so to have the Purchasing Power Parity, Europe should have higher inflation than the United States in one year."
