After studying Iris Hamson€™s credit analysis, George Davies is considering whether he can increase the holding-period return on Yucatan Resort€™s excess cash holdings (which are held in pesos) by investing those cash holdings in the Mexican bond market. Although Davies would be investing in a peso-denominated bond, the investment goal is to achieve the highest holding-period return, measured in U.S. dollars, on the investment.
Davies finds the higher yield on the Mexican 1-year bond, which is considered to be free of credit risk, to be attractive, but he is concerned that depreciation of the peso will reduce the holding-period return, measured in U.S. dollars. Hamson has prepared the following selected financial data to help Davies make the decision:

Hamson recommends buying the Mexican 1-year bond and hedging the foreign currency exposure using the 1-year forward exchange rate. Calculate the U.S. dollar holding-period return that would result from the transaction recommended by Hamson. Is the U.S. dollar holding-period return resulting from the transaction more or less than that available in theU.S.?

Selected Economic and Financial Data US. 1-year Treasury bond yie Mexican 1-year bond yield 2.5% 6.5% Nominal Exchange Rates Spot 1-year forward 9.5000 Pesos-U.S. $1.00 9.8707 Pesos-U.S. $1.00