Exercise 1 Suppose the nominal interest rate on a 1-year US bond is 5% and the nominal interest rate in Mexico for a bond of the same maturity is 10%. The current exchange rate in the spot exchange rate market is 2.5 peso$/US$.

a. If the uncovered interest rate parity is valid and the expected exchange rate for the next year is 2.4 peso$/US$, which of the two investments is more interesting to an American investor?

b. If the covered interest rate parity is valid, what should be the nominal exchange rate on the future dollar contract with a 1-year term?