Change in Forward Rate Due to Arbitrage Earlier this morning, the annual U.S. interest rate was 6 percent, whereas Mexico’s annual interest rate was 8 percent. The spot rate of the Mexican peso was $0.16 . The one-year forward rate of the peso was $0.15 . Assume that as covered interest arbitrage occurred this morning, neither interest rates nor the spot rate was affected; the forward rate was affected, however, and consequently interest rate parity now exists. Explain which type of investor (Mexican or U.S.) engaged in covered interest arbitrage, whether the investor bought or sold pesos forward, and how that affected the forward rate of the peso.
Experts are waiting 24/7 to provide step-by-step solutions in as fast as 30 minutes!*
*Response times vary by subject and question complexity. Median response time is 34 minutes and may be longer for new subjects.