Today’s spot rate of the Mexican peso is $.10. Assume that purchasing power parity holds. The U.S. inflation rate over this year is expected to be 7 percent, while the Mexican inflation over this year is expected to be 3 percent. Carolina Co. plans to import from Mexico and will need 20 million Mexican pesos in one year. Determine the expected amount of dollars to be paid by the Carolina Co. for the pesos in one year.
[(1.07)/(1.03)] – 1 = 3.8835%. So the expected future spot rate is $.1038835.
Carolina will need to pay $.1038835 × 20 million pesos = $2,077,670.