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1 January, 18:31

Assume that interest rate parity holds. The U. S. five‑year interest rate is 5% annualized, and the Mexican five‑year interest rate is 8% annualized. Today's spot rate of the Mexican peso is $.20. What is the approximate five‑year forecast of the peso's spot rate if the five‑year forward rate is used as a forecast?

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  1. 1 January, 19:13
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    Using equation

    F=P (1+i) ^n

    n=5

    using u. s forecast i=0.05

    p=$0.2

    F=0.2 (1+0.05) ^5

    F=$0.255

    Using mexican forecast, we will have

    i=0.08

    F=$0.2938

    Taking average approximate forecast=0.2938+0.255/2=$0.2744
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