Question

Grupo​ Bimbo, headquartered in Mexico​ City, is one of the largest bakery companies in the world. On January​ 1st, when the spot exchange rate is Ps 10.83 divided by $​, the company borrows $25.1 million from a New York bank for one year at 6.77 % interest​ (Mexican banks had quoted 9.62 % for an equivalent loan in​ pesos). During that​ year, U.S. inflation is 2.2 % and Mexican inflation is 4.7 %. At the end of the year the firm repays the dollar loan.

a. If Bimbo expected the spot rate at the end of one year to be equal to purchasing power​ parity, what would be the cost to Bimbo of its dollar loan in​ peso-denominated interest?

b. What is the real interest cost​ (adjusted for​ inflation) to​ Bimbo, in​ peso-denominated terms, of borrowing the dollars for one​ year, again assuming purchasing power​ parity?

c. If the actual spot rate at the end of the year turned out to be Ps 9.66 divided by $​, what was the actual​ peso-denominated interest cost of the​ loan?

Answer 1