Question
Please explain the concepts of expected value of effective yield between Mexican Pesos (MXN) and USD, define the relationship between two currencies, and analyze the
Please explain the concepts of expected value of effective yield between Mexican Pesos (MXN) and USD, define the relationship between two currencies, and analyze the following scenario:
Pittsburgh Co. plans to invest its excess cash in MXN for one year. The one-yearshort-term interest rate on Mexican government treasuries is 19 percent. The probability of the Peso's percentage change in value during the next year is shown in Table 4:
Table 4
Probability Distribution of MXN against USD
POSSIBLE RATE OF CHANGE IN THE MEXICAN PESO (MXN) OVER THE LIFE INVESTMENT
PROBABILITY OF OCCENCE
(15 %)
20 %
(4 %)
50 %
0 %
30 %
What is the expected value of the effective yield based on this information?
Given that the U.S. interest rate for one year is 7 %, what is the probability that a one-year investment in pesos will generate a lower effective yield than could be generated if Pittsburgh Co. simply invested domestically? Please verify if the probability distribution given in Table 4 is consistent with interest rate parity.
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