question 1- Annual inflation rates and exchanges rates in the US and Brazil were

Question

question 1- Annual inflation rates and exchanges rates in the US and Brazil were as follows

Date USD/BRL PI_BRL PI_US

2009 2.6800 112 103

2010 1.8500 122 106

2011 1.5700 129 108

What would be the real exchange rate of BRL in 2011 if we used 2009 as base year

1.5334

1.2345

1.9545

1.8752

question2- Suppose on that on January 1st a Mexican firm borrows $20 million from Citibank (USA) for one year at 8.00% interest per annum.  The loan was taken when the spot rate was USD/MXP3.40.  At the end of the one year when the loan was repaid, the exchange rate was USD/MXP 5.80. Based on the above information, calculate the Mexican Peso cost of the dollar loan in percentages

8.00 %

20%

45.72

84.24%

18.45%

1.5334

1.2345

1.9545

1.8752

Explanation / Answer

A1)

effective PI(USD/ BRL) = PI_BRL / PI_US = 129/108

Hence real exchange rate = 1.57 * 129/108 = 1.8752 = Answer d

A2) Borrowed = % 20 million at 3.40 pesos/dollar

Repayed = $ 20 million * (1+8%) = $ 21.6 million at 5.80 pesos/dollar

Mexican Peso cost of the dollar loan in percentages = 21.6*5.8mn/(20*3.4mn) - 1 = 84.24% = ANswer d

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