Question
Suppose that the following conditions all hold : uncovered and covered interest rate parity, real interest rate parity, relative and absolute purchasing power parity. And
Suppose that the following conditions all hold : uncovered and covered interest rate parity, real interest rate parity, relative and absolute purchasing power parity. And suppose you read the following information in the newspaper:
-The current nominal interest rate for a 1-year deposit in a Brazilian bank is 20% (0.20).
-The current spot exchange rate between Mexico and Brazil is 1 (Mexican peso / Brazilian real).
-The 1-year forward exchange rate between Mexico and Brazil is 0.95 (Mexican peso/Brazilian real).
For each of the following, compute a value using the information above, or state if there is not enough information given above to do complete.
a) nominal interest rate in Mexico
b) expected future spot exchange rate for one year from now (Mexican peso/Brazilian real)
c) expected inflation rate differential over the next year (inflation in Mexico minus inflation in Brazil)
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