Question

Assume that interest rate parity holds. The U.S. five-year interest rate is 5 percent annualized, and the Mexican five-year interest rate is 8 percent annualized. Today's spot rate of the Mexican peso is $.20. What is the approximate five-year forecast of the peso's spot rate if the five-year forward rate is used as a forecast?

Answer 1

Answer:

The 5 year forcast of the peso´s spot rate is $0.1737

Explanation:

Hi, in order to find the Forward rate, we need to use the following formula.

$F_{\frac{USD}{MXP} } =S_{\frac{USD}{MXP} } \frac{(1+R_{USD} )^5}{(1+R_{MXP} )^5}$

Now, everything should look like this.

$F_{\frac{USD}{MXP} } =0.20_{\frac{USD}{MXP} } \frac{(1+0.05 )^5}{(1+0.08)^5} =0.1737_{\frac{USD}{MXP} }$

Best of luck.