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FinanceInternational Financial ManagementIRP The one-year risk-free interest rate in Mexico is 10 percent. The one-year risk-free rate in the United States is 2 percent. Assume that interest rate parity exists. The spot rate of the Mexican peso is $0.14. What is the forward rate premium? What is the one-year forward rate of the peso? Based on the IFE, what is the expected change in the spot rate over the next year? If the spot rate changes as expected according to the IFE, what will be the spot rate in one year? Compare your answers to (b) and (d) and explain the relationship.FindFind*launch*

14th Edition

Madura

Publisher: Cengage

ISBN: 9780357130698

Chapter 8, Problem 26QA

Textbook Problem

IRP The one-year risk-free interest rate in Mexico is 10 percent. The one-year risk-free rate in the United States is 2 percent. Assume that interest rate parity exists. The spot rate of the Mexican peso is $0.14.

- What is the forward rate premium?
- What is the one-year forward rate of the peso?
- Based on the IFE, what is the expected change in the spot rate over the next year?
- If the spot rate changes as expected according to the IFE, what will be the spot rate in one year?
- Compare your answers to (b) and (d) and explain the relationship.

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