Question 9.ST.5: Assume that Mexican interest rates are much higher than U.S....

International Financial Management

Assume that Mexican interest rates are much higher than U.S. interest rates. Also assume that interest rate parity (discussed in Chapter 7) exists. If you use the forward rate of the Mexican peso to forecast the Mexican peso’s future spot rate, would you expect the peso to appreciate or depreciate? Explain.

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Question: 9.ST.1

Assume that the annual U.S. return is expected to be 7 percent for each of the next 4 years, while the annual interest rate in Mexico is expected to be 20 percent. Determine the appropriate 4-year forward rate premium or discount on the Mexican peso, which could be used to forecast the percentage ...

Verified Answer:

U.S. 4-year interest rate = ( 1 + .07 )

^{4}...

Question: 9.ST.2

Consider the following information: Assuming the forward rate was used to forecast the future spot rate, determine whether the Canadian dollar or the Japanese yen was forecasted with more accuracy, based on the absolute forecast error as a percentage of the realized value. ...

Verified Answer:

Canadian dollar

\frac{| \$ .80- \$ .82|}{ ...

Question: 9.ST.6

Warden Co. is considering a project in Venezuela, which will be very profitable if the local currency (bolivar) appreciates against the dollar. If the bolivar depreciates, the project will result in losses. Warden Co. forecasts that the bolivar will appreciate. The bolivar’s value historically has ...

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As the chapter suggests, forecasts of currencies a...

Question: 9.ST.4

An analyst has stated that the British pound seems to increase in value over the 2 weeks following announcements by the Bank of England (the British central bank) that it will raise interest rates. If this statement is true, what are the inferences regarding weak-form or semistrong-form efficiency? ...

Verified Answer:

Semistrong-form efficiency would be refuted since ...

Question: 9.ST.3

Assume that the forward rate and spot rate of the Mexican peso are normally similar at a given point in time. Assume that the peso has depreciated consistently and substantially over the last 3 years. Would the forward rate have been biased over this period? If so, would it typically have ...

Verified Answer:

The forward rate of the peso would have overestima...