It is also the backbone of carry trade practices in global finance. Further, it is highly practical when you want to decide where to park your money, or borrow your funds, or play risky or riskless arbitrage across different nations.

Faced with the aftermath of Covid-19, and in particular with the lack of a definite investment prospect, the firm is coping with the management of its short-term cash positions. Though some firms are currently in need of cash, Nanotronics has accumulated some funds in the prior years and would like to avoid sitting idle on them. Several alternative are considered but none are perceived to be viable. For instance, the stock market is volatile and is subject to a lot of uncertainty due to the pending elections and some stock market analysts views that the market is fundamentally overvalued. The fixed income market does not offer much return at all. If you are persistent in your search, you may find a one-year CD that offers a mere 0.8 of one percent (note 0.8 of 1.0 percent, no 8 percent). The bond and the US treasury markets are in similar situations. With the Federal Funds Rate (FFR) at near zero (one quarter of one percent), the treasury notes and bonds do not also offer satisfactory returns.

The entrepreneurial attitude of the firm prompts it to think out of the box. How? What? Carry trade pops up. After some research, Nanotronics assembles the following data with the aim of executing a carry trade practice on $65,000.00 of its cash in the first round. In the first round, the firm stays conservative and decides not to tie up more than $65,000.00, with the aim of having its final position in USD. The firm needs to decide whether to invest (or deposit) the funds in the U.S. or in Mexico. The firm is looking for a riskless investment activity. Its horizon is exactly 9 months.

The following data are assembled. Note: Nanotronics is neither a banker nor an FX (foreign exchange) dealer. It takes the rates and figures in the market as they are given to it.

Spot rate: Buy rate MXN 19.235/USD;

Spot rate: Sell rate MXN 19.385/USD

Nine-month forward rate: Buy rate MXN 20.115/USD

Nine-month forward rate: Sell rate MXN 20.265/USD

U.S commercial interest rate (borrowing) 4.5 percent

U.S commercial interest rate (lending) 1.0 percent

Mexico commercial interest rate (borrowing or lending) 6.5 percent

Please guide Nanotronics where to invest. Cite the pros and cons of the investment activity you recommend. What happens if Nanotronics relaxes its desire to stay riskless? Then, discuss the pros and cons of such investment practice. Would it be possible to forecast the outcome if the risk factor is left open (not managed)? At the outset, how can a person check whether the U.S. and Mexican markets are in equilibrium or disequilibrium?