1. As of today, assume the following information is available:

	U.S.	Mexico
Real rate of interest required by investors	3%	3%
Nominal interest rate	10%	14%
Spot rate		$0.07
One-year forward rate		$0.06

a. Use the forward rate to forecast the percentage change in the Mexican peso over the next year (hint: if IRP and IFE hold, forward premium or discount = percentage in foreign currency).

b. Use the exact formula of PPP to forecast the percentage change in the Mexican peso over the next year (hint: you need to find expected inflation in the U.S. and Mexico first, which is equal to the difference between nominal interest rate and the real interest rate)

c. Use the spot rate to forecast the percentage change in the Mexican peso over the next year. (5

points in total)