Problem $4$

Intro

The annual risk$-$free interest rate is $8\%$ in the U$.$S$.$ and $6\%$ in Mexico. The spot rate is $$0\mathrm{.}048$ per peso and the one$-$year forward rate is $$0\mathrm{.}05$ per peso.

Part $1$

Attempt $\frac{2}{5}$ for $8$ pts$.$

Who can profit from covered interest arbitrage, and how? Ignore taxes and transaction costs.

No one can profit from covered interest arbitrage.

U$.$S$.$ investors can profit by buying pesos in the forward market.

U$.$S$.$ investors can profit by selling pesos in the forward market.

Mexican investors can profit by buying dollars in the forward market.

Mexican investors can profit by selling dollars in the forward market.