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Suppose the Mexican peso is trading in the spot market at 7 pesos per dollar, and the market expects a 5% depreciation or the peso over the next year what does this imply about the forward market rate if uncovered Interest Rate Parity holds? 6.65 pesos per dollar 7.7 pesos per dollar 7 pesos per dollar 7.35 pesos per dollar

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Answer #1

Uncovered interest rate parity is nothing but the equivalance between difference in interest rates between two countries and relative change in currency foreign exhcnage rates over the same period.

therefore if deflation of 55 then exchange rate should deflate by the same proportion hence peso will depreeciate to 7(1.05)=7.35 PESOS PER DOLLAR

Option D is correct

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