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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!
- 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?
- 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)?
- 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?
- What could go wrong with your scheme?
- What rate of return would you earn if Mexico floated the peso?
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