Robbins Corp. frequently invests excess funds in the Mexican money market. One y

Question

Robbins Corp. frequently invests excess funds in the Mexican money market. One year ago, Robbins invested in a one-year Mexican money market security that provided a yield of 17 percent. At the end of the year, when Robbins converted the Mexican pesos to dollars, the peso had depreciated from $.15 to $.13. What is the effective yield earned by Robbins? Performance of Foreign Money Market Securities Measured by the effective yield Y_e (yield adjusted for the exchange rate) Y_f = SP_f - PP_f/PP_f where SP_f = selling price of the foreign money market security in the foreign currency PP_f = purchase price of the foreign money market security in the foreign currency Y_e = (1 + y_f) times (1 + % Delta S) - 1

Explanation / Answer

As mentioned, we can have 1 MeX Peso for 0.15 USD. Now, suppose we invest 600 USD which means we invest 4000 Mex Peso. Annual yield on that is 17% which means we get 4680 Mex Peso as return. Now, since the Mex Peso has depreciated, when we calculate back to USD, it comes to 608.4 (4680*0.13). Thus the effective annual yield would be calculated as below:-

8.4/600*100=1.4 %

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