Suppose that on January 1st, a mexican firm borrows from citibank (USA) for one year at 8.00% interest per anum. During the year U.S. inflation is 2.00% and mexican inflation is 12.00%.

the loan was taken when the spot rate of Peso was USD/MXN 3.40. Assuming that PPP holds, calculate the mexican peso cost of the dollar loan in percentages.

Hint: Calculate the PPIER based on Mexican and US Inflation.

Amount Borrowed in USD $20,000,000

Interest Rate per anum 8.00%

US Inflation 2.00%

Mexican Inflation 12.00%

Loan at Spot Rate USD/MXN 3.40

Calculate the Mexican Peso cost of the Dollar in percentages

Convert USD Amount borrowed to Pesos 68,000,000

Calculate interest to be paid in Pesos 5,440,000

Amount to be repaid will be Principal + Interests 73,440,000

Mexican Peso Fisher Effect ( initial Exchange Rate)*(1+Mexican rate)/(1+USD rate))^1 3.73

Mexican Pesos Cost after 1 yearinflation 80,040,000

Total cost of loan = (Final /Initial) - 1 8.99%

nominal = real + inflation -3.01%

I am having trouble calculating the appreciation of the Mexican peso incorrectly. What would be the formula to figure out how much would the exchange rate for mexican pesos be after 1 year? I think 3.73 seems too low. I must be doing something wrong. Could you check?