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8. Today, the one-year U.S. interest rate is 2%, while the one-year interest rate in Mexico is 8%. The spot rate of the Mexico peso (MXP) is $.06 The one-year forward rate of the MXP exhibits a 10% discount. Determine the yield (percentage return on investment) to an investor from Mexico who engages in covered interest arbitrage.

Respuesta :

letmeanswer

Solution:

Given,

1 Year U.S. interest rate = 2%

1 Year interest rate in Mexico = 8%

Rate of the Mexico peso = $0.06

MXP exhibits = 10% discount

Now ,

The yield of an investor from Mexico who engages in protected interest arbitration (percentage return on investment) :

( F - 0.06 ) / 0.06 = -10%

F = $0.054 / MXP ;  

MXP1 x.$0.06/ MXP (1+2%) / $0.054 = MXP 1.1333

Yield of 13.33%  > 8% in Mexico

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