Question: Assume that interest rate parity exists. Today, the one-year U.S. interest rate is equal to 8%, while Mexico's one-year interest rate is equal to 10%.

Assume that interest rate parity exists. Today, the one-year U.S. interest rate is equal to 8%, while Mexico's one-year interest rate is equal to 10%. Today, the two-year annualized U.S. interest rate is equal to 11%, while the two-year annualized Mexican interest rate is equal to 11%. West Virginia Co. uses the forward rate to predict the future spot rate. Based on forward rates for one year ahead, and two years ahead, will the peso appreciate or depreciate from the end of year 1 until the end of year 2?

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