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Question 9.ST.1: Assume that the annual U.S. return is expected to be 7 perce...

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 change in the peso over the next 4 years.

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U.S. 4-year interest rate = ( 1 + .07 )^{4} = 131.08%, or 1.3108. Mexican 4-year interest rate = ( 1 + .20)^{4} = 207.36%, or 2.0736

p=\frac{1 + i_{b}}{1+ i_{f}}-1=\frac{1.3108}{2.0736} -1

= -.3679, or -36.79%

 

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