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6. The one-year risk-free interest rate in Mexico is 8%. The one-year risk-free rate in the...

6. The one-year risk-free interest rate in Mexico is 8%. The one-year risk-free rate in the U.S. is 3%. Assume that interest rate parity exists. The spot rate of the Mexican peso is $.15.

a. What is the forward rate premium or discount according to the IRP (using the exact formula)?

b. What is the one-year forward rate of the peso based on the answer from part (a)?

c. Based on the international Fisher effect (using the exact formula), what is the expected change in the spot rate over the next year?

d. If the spot rate changes as expected according to the IFE, what will be the spot rate in one year?

e. Compare your answers to (b) and (d) (6 points in total)

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Expert Solution

6. Answer:

ekkarill92 answered 2 years ago
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