In early December 1994, the Mexican peso was trading at $ 0.30/peso.At the time, the 3month peso interest rate was 16%annuallyin Mexico, 6% annually in the U.S.Since January 1994, when the peso was trading at $ 0.33/peso, inflation had totaled 20% in Mexico, 3% in the U.S.

Three months later, in March 1995, following the peso crisis, the exchange rate was $ 0.20/peso.

Assume that covered interest parity (CIP) held at all times with no transaction costs.

Compute the real value of the peso between January 94 and December 94(Hint: set the price level at 100 for both countries as a starting point in January 94).Explain what happened to the real value of the peso- did it appreciate or depreciate?