Grupo$$ Bimbo, headquartered in Mexico$$ City, is one of the largest bakery companies in the world. On January$1$st$,$ when the spot exchange rate

isPs $10\mathrm{.}80$ divided by $Ps$10\mathrm{.}80/$$$,$

the company borrows

$ $25\mathrm{.}0$$$25\mathrm{.}0$

million from a New York bank for one year at

$6\mathrm{.}80\%6\mathrm{.}80\%$

interest$($Mexican banks had quoted

$9\mathrm{.}60\%9\mathrm{.}60\%$

for an equivalent loan in$$ pesos$).$ During that$$ year, U$.$S$.$ inflation is

$2\mathrm{.}0\%2\mathrm{.}0\%$

and Mexican inflation is

$4\mathrm{.}0\%4\mathrm{.}0\%.$

At the end of the year the firm repays the dollar loan.

a$.$ If Bimbo expected the spot rate at the end of one year to be equal to purchasing power$$ parity, what would be the cost to Bimbo of its dollar loan in$$ peso$-$denominated interest?

b$.$ What is the real interest cost$($adjusted for$$ inflation$)$ to$$ Bimbo, in$$ peso$-$denominated terms, of borrowing the dollars for one$$ year, again assuming purchasing power$$ parity?

c$.$ If the actual spot rate at the end of the year turned out to be

Ps $9\mathrm{.}60$ divided by $Ps$9\mathrm{.}60/$$$,$

what was the actual$$ peso$-$denominated interest cost of the$$ loan?