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Please help answer questions in details and solve by Excel. Thank you! Assume that Mexico pegs the peso to the USD at MXP12.5=$1. The inflation

Please help answer questions in details and solve by Excel. Thank you!

  1. Assume that Mexico pegs the peso to the USD at MXP12.5=$1. The inflation rate in the U.S. has been stable and has averaged 3% per year for the last three years, while the inflation rate in Mexico has averaged 15%/year during the same span. If the real interest rate on 1-year notes is 1% in both countries, what should be the nominal interest rates in each country?
  2. If you work in the investment department of a U.S. bank, what kind of trade would you propose based on the information in (1)?
  3. If the bank allowed you to take a one-year $10 million loan to execute your trade, what rate of return do you expect to earn in one year?
  4. What could go wrong with your scheme?
  5. What rate of return would you earn if Mexico floated the peso?

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