rupo Bimbo(Mexico).GrupoBimbo, headquartered in MexicoCity, is one of the largest bakery companies in the world. On January1st, when the spot exchange rate isPs10.77/$, the company borrows $25.3 million from a New York bank for one year at 6.78% interest(Mexican banks had quoted 9.59% for an equivalent loan inpesos). During thatyear, U.S. inflation is 2.6% and Mexican inflation is 4.2%. At the end of the year the firm repays the dollar loan.

a. If Bimbo expected the spot rate at the end of one year to be equal to purchasing powerparity, what would be the cost to Bimbo of its dollar loan inpeso-denominated interest?

b. What is the real interest cost(adjusted forinflation) toBimbo, inpeso-denominated terms, of borrowing the dollars for oneyear, again assuming purchasing powerparity?

c. If the actual spot rate at the end of the year turned out to be Ps9.61/$, what was the actualpeso-denominated interest cost of theloan?