4. After studying Iris Hamson’s credit analysis, George Davies is considering whether he can increase the holding-period return on Yucatan Resort’s excess cash holdings (which are held in pesos) by investing those cash holdings in the Mexican bond market. Although Davies would be investing in a peso-denominated bond, the investment goal is to achieve the highest holdingperiod return, measured in U.S. dollars, on the investment.

Davies finds the higher yield on the Mexican 1-year bond, which is considered to be free of credit risk, to be attractive, but he is concerned that depreciation of the peso will reduce the holding-

period return, measured in U.S. dollars. Hamson has prepared the following selected financial data to help Davies make the decision:

Selected Economic and Financial Data U.S. 1-year Treasury bond yield 2.5%

Mexican 1-year bond yield 6.5%

Nominal Exchange Rates Spot 9.5000 Pesos = U.S. $1.00 1-year forward 9.8707 Pesos = U.S. $1.00 Hamson recommends buying the Mexican 1-year bond and hedging the foreign currency exposure using the 1-year forward exchange rate. Calculate the U.S. dollar holding-period return that would result from the transaction recommended by Hamson. Is the U.S. dollar holding-period return resulting from the transaction more or less than that available in the U.S.?