Assume the 1-year dollar LIBOR is 0.5% p.a., the 1-year interest rate in Mexico is 10% p.a., the spot exchange rate is MXN20/USD and the 1-year forward rate is MXN21.5/USD. Which of the following statements is correct?

Select one:

A.

The Covered Interest Rate Parity does not hold exactly, the dollar is expensive

forward.

B.

The Covered Interest Rate Parity holds exactly.

C.

The Covered Interest Rate Parity does not hold exactly, the dollar is cheap

forward.

D.

The Uncovered Interest Rate Parity does not hold exactly, the dollar is expensive forward.

E.

The Uncovered Interest Rate Parity does not hold exactly, the dollar is cheap

forward.