International Financial Management
14th Edition
ISBN: 9780357130698
Author: Madura
Publisher: Cengage
expand_more
expand_more
format_list_bulleted
Videos
Question
error_outline
This textbook solution is under construction.
Students have asked these similar questions
Deriving Forecasts of the Future Spot Rate
As of today, assume the following information is available:
U.S.
MEXICO
Real rate of interest required by investors
2%
2%
Nominal interest rate
11%
15%
Spot rate
—
$.20
One-year forward rate
—
$.19
Use the forward rate to forecast the percentage change in the Mexican peso over the next year.
Use the differential in expected inflation to forecast the percentage change in the Mexican peso over the next year.
Use the spot rate to forecast the percentage change in the Mexican peso over the next year.
1, Consider the following table for an eight-year period: Year T-bill return Inflation 1 7.47% 8.53% 2 8.94 12.16 3 6.05 6.76 4 5.97 5.04 5 5.63 6.52 6 8.54 8.84 7 10.74 13.11 8 13.00 12.34
a, Calculate the average return for Treasury bills and the average annual inflation rate (consumer price index) for this period.
b, Calculate the standard deviation of Treasury bill returns and inflation over this time period.
c, Calculate the real return for each year.
d, What is the average real return for Treasury bills?
Suppose annual inflation rates in the U.S. and Mexico are expected to be 6.5% and 75%, respectively, over the next several years. If the current spot rate for the Mexican peso is $0.05, then the best estimate of the peso's spot value in 3 years is
a . $.01190
b . $0.0113
c . $.00321
d . $.00276
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Suppose we have the following Treasury bill returns and inflation rates over an eight year period: Year Treasury Bills Inflation 1 10.45% 12.55% 2 11.36 16.00 3 9.06 10.29 4 8.34 7.97 5 8.88 10.29 6 11.23 12.77 7 14.11 16.98 8 15.97 16.90 a. Calculate the average return for Treasury bills and the average annual inflation rate for this period. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Treasury bills % Inflation % b. Calculate the standard deviation of Treasury bill returns and inflation over this period. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Treasury bills % Inflation %…arrow_forwardSuppose annual inflation rates in the United States and Mexico are expected to be 6 percent and 80 percent, respectively, over the next several years. If the current spot rate for the Mexican peso is $.005, then the best estimate of the peso's spot value in three years is ________. Group of answer choices a$.00276 b$.01190 c$.00321 d$.00102arrow_forwardSuppose annual inflation rates in the U.S. and Mexico are expected to be 6% and 80%, respectively, over the next several years. If the current spot rate for the Mexican peso is $.005, then the best estimate of the peso's spot value in 3 years is a.$.01190 b.$.00276 c.$.00321 d.$.00102arrow_forward
- For prices that are increasing at an annual rateof 5% the first year and 8% the second year, determine the average inflation rate ( f ) over the twoyears.arrow_forwardUsing the Treasury yield information in part c, calculate the following rates using geometric averages (round your answers to three decimal places): The 1-year rate, 1 year from now The 5-year rate, 5 years from now The 10-year rate, 10 years from now The 10-year rate, 20 years from nowarrow_forwardConsider the following table for an eight-year period: Year T-bill return Inflation 1 7.47 % 8.53 % 2 8.94 12.16 3 6.05 6.76 4 5.97 5.04 5 5.63 6.52 6 8.54 8.84 7 10.74 13.11 8 13.00 12.34 Calculate the average return for Treasury bills and the average annual inflation rate (consumer price index) for this period. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Average return for Treasury bills % Average annual inflation rate % Calculate the standard deviation of Treasury bill returns and inflation over this time period. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Standard deviation of Treasury bills % Standard deviation of inflation % Calculate the real return for each year. (A negative answer should be indicated by a minus sign. Leave no cells…arrow_forward
- Question #21 is attacthed below in image. Based on the spot rates in Problem 21, and assuming a constant real interest rate of 2 percent, what are the expected inflation rates for the next four years?arrow_forwardFind a country that has experienced more than two years of reported negative inflation in the last 10 years, can you suggest why this might have happened?arrow_forwardGiven the cash flows in actual dollars provided in the following table, convert the cash flows to equivalent cash flows in constant dollars if the base year is time 0. Assume that the market interest rate is 16% and that the general inflation rate(f) is estimated at 4% per year. n Cash Flow (In Actual Dollars) 0 $20,5004 $41,5005 $36,5007 $55,500arrow_forward
- What is the (exact) nominal return on an investment that earns a real return of 14.7% while inflation is 7.4%? Enter your response, in percent (%), correct to TWO decimal places.arrow_forwardSuppose you own an investment that had a total nominal return of 10.7% last year. If the inflation rate last year was 3.7%, what was your real return (in percent)? (Hint - think of economist Irving Fisher, how would Fisher have answered this question by doing an exact calculation?). . .arrow_forwardThe yield curve indicates that the two-year interest rate will be a function of what variables? Include in your answer an explanation of how changes in these variables will affect the two-year interest rate.arrow_forward
arrow_back_ios
arrow_forward_ios
Recommended textbooks for you
The Exchange Rate and the Foreign Exchange Market [AP Macroeconomics Explained]; Author: Heimler's History;https://www.youtube.com/watch?v=JsKLBpy6cEc;License: Standard Youtube License