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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

image text in transcribed 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 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 concerned that depreciation of the peso will reduce the holding period return, measured in U.S. dollars. Hamson has prepared selected economic and financial data, given in the table below, to help Davies make the decision. (MXN refers to the Mexican peso). [Refer to Ch06 End-of-Chapter Problem \# 11] (1) The expected exchange rate one year from now is MXN per dollar, assuming that Davies is correct in his expectations about the real exchange rate and the Mexican and U.S. inflation rates and that the relative form of PPP holds. (2) Is the one-year forward rate correctly priced if interest rate parity holds

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