Assume that interest rate parity exists. Today the one-year U.S. interest rate is equal to 8 percent, while Mexico's one-year interest rate is equal to 10 percent. Today the two-year annualized U.S. interest rate is equal to 11 percent, while the two-year annualized Mexican interest rate is equal to 11 percent. 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?

The one-year forward rate of the peso exhibits -Select-a premiuma discountno premium or discountItem 1 because the Mexican interest rate -Select-exceedsis the same asis less thanItem 2 the U.S. one-year interest rate. The two-year forward rate of the peso exhibits -Select-a premiuma discountno premium or discountItem 3 because the Mexican interest rate -Select-exceedsis the same asis less thanItem 4 the U.S. interest rate. Consequently, the information implies an expected -Select-appreciationdepreciationItem 5 of the peso from the end of year 1 until the end of year 2.