Business

FinanceInternational Financial ManagementChange 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.FindFind*launch*

14th Edition

Madura

Publisher: Cengage

ISBN: 9780357130698

Chapter 7, Problem 44QA

Textbook Problem

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.

This textbook solution is under construction.