You are examining rate reports for your boss in an effort to predict exchange ra
ID: 2762430 • Letter: Y
Question
You are examining rate reports for your boss in an effort to predict exchange rates. You notice that the interest rate per annum is 4.86% in the United States and 65.0% in Mexico. Use the IFE formula for this problem. Based on the reported interest rates, by what percent would you predict the exchange rate between the U.S. dollar ($) and the Mexican Peso (MXN) to change; What should happen to the Mexican Peso relative to the U.S. dollar? If the exchange rate is MXN 17.6681/S today, what would you expect the spot rate to be one year hence? Now use the RPPP formula for this problem. What is the answer if you use RPPP? By how much do they differ?Explanation / Answer
a. IFE = (1 + Rate US)/(1+ Rate mexico) -1
IFE interest rate MXN = (1+4.86%)/(1+65%) - 1 = - 36.48%
b. Mexican peso would need to depreciate by 36.48% in order to make actual return equal to 4.86% United States interest rate per annum.
c. MXN = 17.6681 per Dollar or 1/17.6681=$ .0566 MXN
Expected future spot rate is calculated by multiplying the spot rate by a ratio of the foreign interest rate to domestic interest rate: 17.6681 x (1+ 4.86%)/(1+65%) =11.222
d. Forward rate = Spot exchange rate x (1+I us)/(1+Imx) = 17.6681 x (1+ 4.86%)/(1+65%) = $11.222
Difference = $0
RPPP is based on inflation rate as inflation rate is not given , have assumed interest rate as inflation
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.