QUESTION 1 The Mexican Peso is quoted at .0482-.0485 US$/Peso spot. 6-month forward contracts are quoted .0471-.0479. 6-month interest rates in the US (for both borrowing and investing) are at a 2% annual rate. What 6-month annual interest rate in Mexico for borrowing and investing would allow an arbitrage? Ans: 3% 4% 5% 7% None of the above

QUESTION 2 Assume the US and Mexico have the same expected real rate of interest. If inflation in the US is 7% per year, interest rates rates in the US are at 3% per year, and interest rates in Mexico are at 8.2%, what inflation rate do you expect in Mexico? Give your answer as a percentage (but do not include the "%" symbol).