After studying Iris Hamson's credit analysis, George Davies is considening 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 goat is to achieve the highest holding period return, measured in U.S, dollars, on the investment. Davies finds the higher yield on the Mexican one-year bond, which is considered to be free of credit risk, to be attractive but he is concemed that depreciation of the peso will reduce the holding period retum, measured in U.S. dollars. Hamson has prepared selected economic and financial data to help Davies make the decision. Hamson recommends buying the Mexican one-year bond and hedging the roreign currency exposure using the one:year forward exchange rate. She concludes. -This transaction will result in a Us, dollar holding period refum that is equat to the holding period return of the U.S. one-year bond:" o. Calculate the US dollat holding period retum that would resuit from the transaction iecommended by Hamson Show your calculations. State whether Hamson's conclusion about the US dollar holding period return resuting from the transaction is correct or incorrect a. Calculate the U.S. dollar holding period return that would result from the transaction recommended by Hamson Show your calculations. State whether Hamson's conclusion about the U.S. dollar holding period retum resalting from the transaction is correct or incorrect. After conducting his own analysis of the'U.S. and Mexican economies, Davies expects that both the U.S. inillation rate and the real exchang rate will remain constant over the coming year. Because of favorable political developments in Mexico, however, he expects that the Mexican inflation rate (in annual terms) will fall from 6 percent to 3 percent before the end of the year. As a result, Davies decides to invest Yucatan Resort's cash holdings in the Mexican one-year bond but not to hedge the currency exposure. (Do not round intermediate calculations. Round your answer to 1 decimal place.) b. Calculate the expected exchange rate (pesos per doliar) one year from now. Show your calculations. Note Your calculations should assume that Davies is correct in his expectations about the real exchange rate and the Mexican and U.S. inflation rates. (Round your intermediate calculations to 4 decimal places.) c. Calculate the expected US. dollar holding period return on the Mexican oneyear bond Show your calculations. Note: Your calculations should assume that Davies is correct in his expectations about the real exchange rate and the Mexican and U.S inflation rates. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
