The requirement here was to calculate the expected spot rate using purchasing power parity (PPP) and then to discuss briefly the relationship between the expected spot rate and the current forward exchange rate. The current forward rate is an exchange rate available now for future delivery/sale of foreign currency, while the expected spot rate is a prediction of what the spot rate will be at the end of a given period of time.

Most answers calculated correctly the expected spot rate using PPP and then became stuck. The brief discussion required by the question was looking for understanding of expectations theory, which is the relationship between the expected spot rate (provided by PPP) and the forward rate (provided by interest rate parity or IRP) that completes four-way equivalence. This part of the syllabus seeks an understanding of the determinants of exchange rates.