Political Risk and Currency Derivative Values Assume that interest rate parity exists. At 10: 30 a.m. the media reported that the Mexican government’s political problems had been solved, which reduced the expected volatility of the Mexican peso against the dollar over the next month. However, this news had no effect on the prevailing one-month interest rates of the U.S. dollar or Mexican peso, or on the expected exchange rate of the Mexican peso in one month. The spot rate of the Mexican peso was $0.13 as of 10 a.m. and remained at that level all morning.
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