You believe that IRP presently exists. The nominal annual interest rate in Mexico is 1 6 percent.
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Question:
You believe that IRP presently exists. The nominal annual interest rate in Mexico is percent. The nominal annual interest rate in the United States is percent. You expect that annual inflation will be about percent in Mexico and percent in the United States. The spot rate of the Mexican peso is $ Put options on pesos are available with a oneyear expiration date, an exercise price of $ and a premium of $ per unit.
You will receive million pesos in one year. Do not round intermediate calculations. Round your answers to the nearest dollar.
Determine the expected amount of dollars that you will receive if you use a forward hedge.
$
Determine the expected amount of dollars that you will receive if you do not hedge and believe in purchasing power parity PPP
$
Determine the amount of dollars that you will expect to receive if you believe in PPP and use a currency put option hedge. Account for the premium you would pay on the put option.
$
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