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PROBLEM 5 (10 POINTS):

Assume that Interest Rate Parity holds. US five-year interest is 6% annualized and the Mexican five-year interest rate is 9% annualized.

Todays spot rate of the Mexican Peso is 0.25 $.

1. What is the five year forecast of the Pesos spot rate if the five-year forward rate is used as a forecast?

PROBLEM 6 (15 POINTS):

The value of some Latin American currencies mainly the Brazilian Real and the Argentinian Pesos have declined substantially against the Euro over time.

Brazil and Argentina have high inflation rates and high interest rates.

1. If the forward rate is used as a market-based forecast, will this rate result in a forecast of appreciation, depreciation or no change in any of the two currencies?

2. If technical forecasting is used, will this result in a forecast of appreciation, depreciation or no change in the value of a specific Latin American currency? explain

3. Do you think French companies need to make exchange rate forecast to accurately predict the future values of Real and Pesos? explain in details why or why not