(Ch. 8) Deriving Forecasts of the Future Spot Rate. As of today, assume the following information is available:

U.S. Mexico

Real rate of interest required by investors 3% 3%

Nominal interest rate 4% 9%

Spot Rate (St) .048 in MXNUSD

One-year forward rate (Ft,1-yr) .045 in MXNUSD

a. Use the forward rate to forecast the percentage change in the MXNUSD over the next year. (5 points)

b. Use the differential in expected inflation to forecast the percentage change in the MXNUSD over the next year. (Hint: you can get the expected inflation using Fisher's formula -i.e., the nominal interest rate is equal to the real interest rate plus expected inflation.) (5 points)

c. Use the spot rate to forecast the percentage change in the MXNUSD over the next year. (5 points)