The one-year risk-free interest rate in Mexico is 10 percent. The one-year risk-free rate in the United

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The one-year risk-free interest rate in Mexico is 10 percent. The one-year risk-free rate in the United States is 2 percent. Assume that interest rate parity exists. The spot rate of the Mexican peso is $.14.

a. What is the forward rate premium?

b. What is the one-year forward rate of the peso?

c. Based on the international Fisher effect, what is the expected change in the spot rate over the next year?

d. If the spot rate changes as expected according to the IFE, what will be the spot rate in one year?

e. Compare your answers to (b) and (d) and explain the relationship.

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International financial management

ISBN: 978-0324593471

9th Edition

Authors: Jeff Madura

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Question Posted: Jun 05, 2012 02:28 AM

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The one-year risk-free interest rate in Mexico is 10 percent. The one-year risk-free rate in the United

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a According to interest rate parity the forward premium is b The forward rate is 14 1 ...View the full answer

International financial management

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