IRP

The one-year risk-free interest rate in Mexico is 10%. The one-year risk-free rate in the U.S. is 2%. Assume that interest rate parity exists. The spot rate of the Mexican peso is $.14.

 

Don't use plagiarized sources. Get Your Custom Essay on
Need an answer from similar question? You have just landed to the most confidential, trustful essay writing service to order the paper from.
Just from $11/Page
Order Now

a. What is the forward rate premium?

b. What is the one-year forward rate of the peso?

c. Based on the international Fisher effect, 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) and explain the relationship.