1.

S0 = spot rate, 
S1 = new spot exchange rate
(if PPP held)
f0 = forward rate
i = nominal interest rate
pi = inflation rate


a) According of PPP HRK
is over/undervalued ?

S^USD/HRK(PPP) = P(HRK)/
P(USD) = 9.6981 Kn per unit
of $ = implied rate

USD/HRK 5.6288 = actual rate

currency over/undervalued

base currency : (actual rate -
 / implied rate) - 1

quote currency : (implied rate
/ actual rate) - 1



b.What is the expected future
exchange rate in 2023
if the PPP held?

(We have 1 spot exch r  2022)
(We calculate spot exc 2023)

S1 EUR/USD (PPP) = S0 EUR/USD
(PPP) * (1+pi^USD)/(1+pi^EUR)



c. We know both spot exchange
rate, did PPP hold between
2 periods? look at i

Same formula with i, if e
different : PPP didn't hold


d. PPP with a forward rate 
and spot rate

forward discount (same 
formula chap 1) : (Fw rate /
Spot rate) - 1

inflation difference (pi) =
(1+pi^USD/1+pi^EUR) - 1

interest diff (same with i)