1. Suppose now PepsiCos India Office needs INR 20 million immediately (on November 1, 2020) for its operations at one of its plants. The company can borrow funds today in India or in the U.S. at the 3-month annualized interest rates quoted below, and assume it can hedge any currency risk in the forward market at the INR/$ rate below. Given these quotes, what would PepsiCo pay in $ terms (principal + interest) at the end of three months (on February 1, 2021) under each choice, and which loan would it choose? Based on what you find, does covered interest rate parity hold between India and the U.S.? Be sure to show your work.

Interest rates (all rates are % on annual basis) as of Nov 1, 2020:

Deposit Lending

3-month INR 3.5 3.8

3-month U.S. $ 0.5 0.7

Spot & Forward (on Nov.1): Banks Bid Banks Ask

Spot #INR/1$ INR73.20/$ INR 73.50/$

3-month forward #INR/1$ INR74.15/$ INR 74. 50/$