In: Finance
Suppose a bank is quoting the following for the Mexican Peso/$ spot exchange rate, and sees the following interest rates (ignore bid/ask spreads):
Spot exchange rate: MXN 21.50/USD
Interest rate on a 180-day Mexican asset (quoted on an annual basis) = 4.95%
Interest rate on a 180-day US asset (quoted on an annual basis) = 0.28%
Given these quotes, what should be the 180-day forward MXN/USD exchange rate quoted by the bank under the assumption covered interest parity holds?
Spot rate 1 USD = 21.50 MXN
interest rate on 180-days Mexican asset = 4.95%
interest rate on 180-days US asset = 0.28%
days =180
Forward rate formula for USD= spot rate*(1+(Mexican asset interest rate*days/360)/(1+(US asset interest rate*days/360))
=21.50*(1+(4.95%*180/360)/)(1+(0.28%*180/360))
=22.00132315
So forward rate is 22.0013 MXN/USD
It means 1 USD has 22.0013 MXN