Assume that interest rate parity holds. The U.S. 5-year interest rate is 3% annualized, and the Mexican 5-year interest rate is 7% annualized. Today's spot rate of the Mexican peso is $.20.

(1) Calculate the 5-year forecast of the peso's spot rate if the 5-year forward rate is used as a forecast

(2) Identify 3 factors that might cause the forecasted rate to be incorrect

Answer rating: 100% (QA)

1 Fwd rate Acc to IRPT Fwd rate Spot rate 1Hi 1 Fi Hi Int ... View the full answer