1. Carry trade (UIA)

If you decide to seek the higher interest rate in available in USD but not covering the forward dollar receipts, how should you redesign your strategy? Assess the riskiness of this decision. The Federal Reserve decided to keep the interest rate unchanged on September 21 meeting. However, there is a high expectation that the Fed might increase the interest rate later this year, how would you factor this into your decision?

1. Relative PPP

Todays spot rate of the Mexican peso is MXP19.84/USD. Assume the relative PPP holds, the U.S. inflation over one year is expected to 1 percent, while the Mexican inflation is expected to be 3 percent. If you plan to go on vacation in Cancun, Mexico and will need 50,000 Mexican pesos in one year (which is $2520 at current spot rate). Determine the expected amount of dollars you need to pay for 50,000 Mexican pesos in one year.

please show the calculation and steps for both questions.