1. 1.Consider the following hypothetical facts about Mexico: The peso recently lost over 40% of its value relative to the dollar. Over the course of the next 90 days, there is a 25% chance that the Mexican government will lose control of the economy. If it does, the peso will lose 20% of its value relative to the dollar, and the Mexican stock market will fall by 10%. Alternatively, the U.S. Congress may vote to help Mexico by offering collateral for Mexican government loans. In that case, the peso will appreciate 10% relative to the dollar, and the Mexican stock market will rise by 5%. As a U.S. investor with no current assets or liabilities in Mexico, you have decided to speculate. Calculate your expected dollar return from investing dollars in the Mexican stock market for the next 90 days. Express the return in annualized terms.
   
    
    
   2.Suppose that you observe a 90-day forward rate of $1.14/€. The current spot rate is $1.13/€, and you expect that the spot rate that will be realized 90 days in the future is $1.12/€. What contract would you make to speculate in the forward market by either buying or selling €10,000,000? What is your expected profit? If the standard deviation of the 90-day rate of appreciation of the euro relative to the dollar is 2%, what range covers 95% of your possible profits or losses?
   
   
    
   3.Suppose the rate of appreciation of the dollar relative to the yen over the next 90 days is normally distributed with a mean of -1% and a standard deviation of 5%. Use a spreadsheet program to graph the distribution of the future yen–dollar exchange rate. If the current spot exchange rate is ¥105 / $, and the 90-day forward rate is ¥106/ $, describe the distribution of yen profits or losses from selling $5,000,000 forward (note to use statistical excel functions norm.inv and norm.dist).