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?

FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698

Solutions

Chapter 9, Problem 29QA
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?

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