Suppose a bank is quoting the following for the Mexican Peso/$ spot exchange rate, and sees...

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?

Solutions

Expert Solution

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

jeff jeffy answered 2 years ago

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