Textbook Problem

Deriving Forecasts from Forward Rates Assume that interest rate parity exists. Today the one-year U.S. interest rate is equal to 8 percent, whereas Mexico’s one-year interest rate is equal to 10 percent. Today the two-year annualized U.S. interest rate is equal to 11 percent, whereas the two-year annualized Mexican interest rate is equal to 11 percent. West Virginia Co. uses the forward rate to predict the future spot rate. Based on forward rates for one year ahead and two years ahead, will the peso appreciate or depreciate from the end of year 1 until the end of year $2?