Question
The one-year risk-free interest rate in Mexico is 10 percent. The one-year risk-free rate in the United States is 2 percent. Assume that interest rate
The one-year risk-free interest rate in Mexico is 10 percent. The one-year risk-free rate in the United States is 2 percent. Assume that interest rate parity exists. The spot rate of the Mexican peso is $.14.
What is the forward rate premium? [4 MARKS]
What is the one-year forward rate of the peso? [4 MARKS]
Based on the international Fisher effect, what is the expected change in the spot rate over the next year? [4 MARKS]
If the spot rate changes as expected according to the IFE, what will be the spot rate in one year? [4 MARKS]
Compare your answers to (b) and (d) and explain the relationship.
[4 MARKS]
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Multinational Finance Evaluating Opportunities Costs and Risks of Operations
Authors: Kirt C. Butler
5th edition
1118270126, 978-1118285169, 1118285166, 978-1-119-2034, 978-1118270127
