The one-year risk-free rate in the U.S. is 3.060 percent and the one-year risk-free rate in Mexico is 4.88

The one-year risk-free rate in the U.S. is 3.060 percent and the one-year risk-free rate in Mexico is 4.88 percent. The one-year forward rate between the Mexican peso and the U.S. dollar is MXN12.262/$. What is the spot exchange rate? Assume interest rate parity holds.

rev: 05_17_2019_QC_CS-168753

Multiple Choice

MXN12.049/$
MXN12.479/$
MXN14.889/$
MXN12.262/$
MXN13.919/$

Expert Solution

The option (a) is correct option.

Explanation:

Spot exchange rate (x/y) = Forward rate(x/y)×(1+rate for y)/(1+rate for x)

Spot exchange rate (MXN/$) = MXN/$12.262 ×(1+0.03060)/(1+0.0488)

Spot exchange rate = MXN/$12.049

Hence, the option (a) is correct option.

The option (a) is correct option.

Junaid answered 2 years ago

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