Question

Assume the following information:
Spot rate of Mexican peso : $.100
180-day forward rate of Mexican peso : $.098
180-day Mexican interest rate : 6%
180-day U.S. interest rate : 5%
a) What would be the return to a Mexican investor who has 1,000,000 Mexican pesos from using covered interest arbitrage? (i.e. the Mexican investor will convert the peso into U.S. dollar at the spot rate and invest it in the U.S. for 180 days, and simultaneously sell a U.S. dollar currency forward contract with the same maturity). Does the return exceed the return from investing in Mexico over the 180-day period? Is it worthwhile for the Mexican investor to invest in the U.S.?
b) Is it worthwhile for a U.S. investor who uses a covered interest arbitrage for investing in Mexico?

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

ke - Microsoft Excel (Product Activation Failed) Formulas File Home Insert Page Layout Data Review View Add-Ins Z AutoSum Cut A A Wrap Text Calibri 11 General E Copy Fill Merge & Center Insert Delete Format Sort & Find & Filter Select Paste B I U 000 Conditional Format Cell % Format Painter Clear Formatting as Table Styles Number Clipboard Font Alignment Styles Cells Editing YS291 Formula Bar YO YR YS YT YU YV YW YY YZ ZA ZB 273 0.1 DOLLAR PER PESO 274 SPOT RATE = 275 FORWARD RATE = 0.098 US RATE 276 5% 277 MEXICO RATE 6% 278 279 MEXICAN INVESTOR HAS 1000000 PESOS 280 HE INVESTS = 1000000 X 0.1 100000 DOLLARS 281 100000 5% 282 INVEST IN US AT 5% = 105000 283 ON MATURITY, 284 105000/0.098 = 285 CONVERT TO PESOS = 1071428.57 286 (1071428.57-1000000) 1 = 287 SO YIELD = 7.14% a 288 YES, RETURN EXCEEDS DOMESTIC RETURN 289 IT IS WORTHWHILE FOR MAXICAN INVESTOR 290 291 КЕ САРМ UTILITY, SHARPE, beta DGM beta port future INDEX LEASING DIR right RESI e 0 PV, FV, ANNUITY YIELD bond portfolio clean coNvexity INTL CAP BUD cap stru WACC L 130 % erences: GF466 W 08:40 T ENG 08-11-2019

ke - Microsoft Excel (Product Activation Failed) Review File Home Insert Page Layout Formulas Data View Add-Ins Σ AutoSum - Cut A A Wrap Text Calibri 11 General Copy Fill Paste Merge & Center Insert Delete Format Sort & Find & Filter Select B I U +.0 .00 Conditional Format Cell % .00 0 Format Painter Clear Formatting as Table Styles Number Editing Clipboard Font Alignment Styles Cells fx YS308 YY YZ YO YR YS YT YU YV YW YX ZA ZB 290 291 292 SUPPOSE US INVESTOR HAS 1000000 DOLLARS HE INVESTS 1000000 / 0.1 293 10000000 DOLLARS 294 10000000*6% = 10600000 295 INVEST IN MEXICO AT 6% = 296 297 ON MATURITY, 10600000*0.098 298 CONVERT TO PESOS = 1038800 299 sO YIELD = 300 (1038800-1000000) - 1 = 3.88% а 301 NO, RETURN IS LESS THAN US RATE SO IT IS NOT WORTHWHILE FOR US INVESTOR 302 303 304 305 306 307 308 UTILITY, SHARPE, beta beta LEASING YIELD bond portfolio RESI e 0 CONVEXITY DGM PV, FV, ANNUITY clean КE САРМ port future INDEX DIR right INTL CAP BUD cap stru WACC Rea erences: GF466 130% WA 08:40 tENG 08-11-2019