Mexican interest rates are normally substantially higher than U.S. interest rates. a. Assuming that interest rate...

Question

Question

Mexican interest rates are normally substantially higher than U.S. interest rates. a. Assuming that interest rate...

Mexican interest rates are normally substantially higher than U.S. interest rates. a. Assuming that interest rate parity exists, do you think hedging with a forward rate would be beneficial if the spot rate of the Mexican peso was expected to decline slightly over time?

b. Would hedging with a money market hedge be beneficial if the spot rate of the Mexican peso was expected to decline slightly over time (assume zero transaction costs)? Explain.

c. What are some limitations on using currency futures or options that may make it difficult for you to perfectly hedge against exchange rate risk over the next year or so.

business economics

Add a comment Improve this question Transcribed image text

Answer 1

Answer #1

Add a comment

Answer 2

Similar Homework Help Questions

Assume the following information: Spot rate of Mexican peso : $.100 180-day forward rate of Mexican...

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....
2. Assume the following information: Spot rate of Mexican peso : $.100 180-day forward rate of Mexican peso : $.098 180-...

2. 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...
Implication of the Forward Rate for Foreign Financing: Misner, Inc., is a U.S.-based MNC with a...

Implication of the Forward Rate for Foreign Financing: Misner, Inc., is a U.S.-based MNC with a subsidiary in Mexico. Its Mexican subsidiary needs a one-year loan of 10 million pesos for operating expenses. It can borrow pesos at 11% and can use peso revenues to be received over the year to repay the loan. Alternatively, it can barrow dollars at 6%. Interest rate parity exists. The forward rate of the peso is expected to overestimate the spot rate of the...

Assume that interest rate parity holds. The U.S. five‑year interest rate is 0.07 annualized, and the...

Assume that interest rate parity holds. The U.S. five‑year interest rate is 0.07 annualized, and the Mexican five‑year interest rate is 0.03 annualized. Today’s spot rate of the Mexican peso is $0.30. What is the approximate 10‑year forecast of the peso’s spot rate if the 10‑year forward rate is used as a forecast?
3. Covered Interest Arbitrage. Assume the following information: Spot rate of Mexican peso = $ .100 1-year Forward...

3. Covered Interest Arbitrage. Assume the following information: Spot rate of Mexican peso = $ .100 1-year Forward rate of Mexican peso = $ .098 Mexican interest rate = 8% US. interest rate =5% Show how to identify any arbitrage opportunity based on the Interest Rate Parity (IRP). What is your strategy to achieve your profit? What is your arbitrage profit per $1,000,000 (CIA) ?
Today’s spot rate of the Mexican peso is $.10. Assume that purchasing power parity holds. The...

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.

Suppose a U.S. firm buys $200,000 worth of stereo speaker wire from a Mexican manufacturer for...

Suppose a U.S. firm buys $200,000 worth of stereo speaker wire from a Mexican manufacturer for delivery in 60 days with payment to be made in 90 days (30 days after the goods are received). The rising U.S. deficit has caused the dollar to depreciate against the peso recently. The current exchange rate is 5.50 pesos per U.S. dollar. The 90-day forward rate is 5.45 pesos/dollar. The firm goes into the forward market today and buys enough Mexican pesos at...
Cross Rates At today's spot exchange rates 1 U.S. dollar can be exchanged for 12 Mexican...

Cross Rates At today's spot exchange rates 1 U.S. dollar can be exchanged for 12 Mexican pesos or for 110.32 Japanese yen. You have pesos that you would like to exchange for yen. What is the cross rate between the yen and the peso; that is, how many yen would you receive for every peso exchanged? Round your answer to two decimal places.
At today's spot exchange rates 1 U.S. dollar can be exchanged for 10 Mexican pesos or...

At today's spot exchange rates 1 U.S. dollar can be exchanged for 10 Mexican pesos or for 110.19 Japanese yen. You have pesos that you would like to exchange for yen. What is the cross rate between the yen and the peso; that is, how many yen would you receive for every peso exchanged? Round your answer to two decimal places.

Interest rates are 7% in the U.S and 3% in Mexico and Interest Rate Parity exists....

Interest rates are 7% in the U.S and 3% in Mexico and Interest Rate Parity exists. What return would a U.S. investor make using covered interest arbitrage?

Mexican interest rates are normally substantially higher than U.S. interest rates. a. Assuming that interest rate...

Homework Answers

Add Answer to:
Mexican interest rates are normally substantially higher than U.S. interest rates. a. Assuming that interest rate...

Post as a guest

Earn Coins

Assume the following information: Spot rate of Mexican peso : $.100 180-day forward rate of Mexican...

2. Assume the following information: Spot rate of Mexican peso : $.100 180-day forward rate of Mexican peso : $.098 180-...

Implication of the Forward Rate for Foreign Financing: Misner, Inc., is a U.S.-based MNC with a...

Assume that interest rate parity holds. The U.S. five‑year interest rate is 0.07 annualized, and the...

3. Covered Interest Arbitrage. Assume the following information: Spot rate of Mexican peso = $ .100 1-year Forward...

Today’s spot rate of the Mexican peso is $.10. Assume that purchasing power parity holds. The...

Suppose a U.S. firm buys $200,000 worth of stereo speaker wire from a Mexican manufacturer for...

Cross Rates At today's spot exchange rates 1 U.S. dollar can be exchanged for 12 Mexican...

At today's spot exchange rates 1 U.S. dollar can be exchanged for 10 Mexican pesos or...

Interest rates are 7% in the U.S and 3% in Mexico and Interest Rate Parity exists....

Mexican interest rates are normally substantially higher than U.S. interest rates. a. Assuming that interest rate...

Homework Answers

Add Answer to: Mexican interest rates are normally substantially higher than U.S. interest rates. a. Assuming that interest rate...

Post as a guest

Earn Coins

Add Answer to:
Mexican interest rates are normally substantially higher than U.S. interest rates. a. Assuming that interest rate...