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Interest rates in Mexico are 3% and in the United States they are currently 0.025%. The...

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Question

Finance

Interest rates in Mexico are 3% and in the United States theyare currently 0.025%. The MXN/USD spot rate is 0.076. You areoffered a 12-month forward rate of .08.

A) show whether the forward contract is overvalued orundervalued.

B) which currency should you borrow and why ?

C) what is the percentage return from engaging in CoveredInterest Arbitrage ?

Answer & Explanation Solved by verified expert
3.7 Ratings (604 Votes)
aShowing whether the forward contract is undervalued orovervaluedFormula to calculate forward contractSubstituting Equation with 0076 for spot rate 3 or 003 forforeign interest rate and 0025 or 000025 for domestic interestrate to calculate the forward contractbAn individual should borrow the    See Answer
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