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The one-year risk free rate in Mexico is 10%, and in the US is 5%. Assume...

The one-year risk free rate in Mexico is 10%, and in the US is 5%. Assume IRP hold and that the current spot rate is 19.50 pesos/USD. Based on the information, what should be the one year forward rate?

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Answer #1

Fwd rate = Spot rate ( 1+Hi ) / ( 1+Fi)

Hi = Int Rate in Mexico

Fi = Int Rate in US

Fwd rate = Spot rate ( 1+Hi ) / ( 1+Fi)

= 19.50 Peso * ( 1 + 0.10) / ( 1+0.05)

= 19.50 * 1.1 / 1.05

= Peso 20.43

One Year Fwd rate is 1 USD = 20.43 Peso

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