Grupo Bimbo, headquartered in Mexico City, is one of the largest bakery companies in the world. On January 1st, when the spot exchange rate is Ps10.80/$, the company borrows $25.0 million from a New York bank for one year at 6.80% interest (Mexican banks had quoted 9.60% for an equivalent loan in pesos). During the year, U.S. inflation is 2% and Mexican inflation is 4%. At the end of the year the firm repays the dollar loan.
a. If Bimbo expected the spot rate at the end of one year to be that equal to purchasing power parity, what would be the cost to Bimbo of its dollar loan in peso-denominated interest?
b. What is the real interest cost (adjusted for inflation) to Bimbo, in peso-denominated terms, of borrowing the dollars for one year, again assuming purchasing power parity ?
c. If the actual spot rate at the end of the year turned out to be Ps9.60/$, what was the actual peso-denominated interest cost of the loan?