Assume that interest rate parity holds. The U.S. five‑year interest rate is 0.07 annualized, and the Mexican five‑year interest rate is 0.03 annualized. Today’s spot rate of the Mexican peso is $0.30. What is the approximate 10‑year forecast of the peso’s spot rate if the 10‑year forward rate is used as a forecast?

Microeconomics
13th Edition
ISBN:9781337617406
Author:Roger A. Arnold
Publisher:Roger A. Arnold
Chapter21: International Finance
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Assume that interest rate parity holds. The U.S. five‑year interest rate is 0.07 annualized, and the Mexican five‑year interest rate is 0.03 annualized. Today’s spot rate of the Mexican peso is $0.30. What is the approximate 10‑year forecast of the peso’s spot rate if the 10‑year forward rate is used as a forecast?

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