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

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

Step-by-step explanation:

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

`F_{(USD)/(MXP) } =S_{(USD)/(MXP) } ((1+R_(USD) )^5)/((1+R_(MXP) )^5)`

Now, everything should look like this.

`F_{(USD)/(MXP) } =0.20_{(USD)/(MXP) } ((1+0.05 )^5)/((1+0.08)^5) =0.1737_{(USD)/(MXP) }`

Best of luck.