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International Finance on the Mexican Peso

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16. Forward Rate Forecast. Assume that you obtain a quote for a one-year forward rate on the Mexican peso. Assume that Mexico's one-year interest rate is 40 percent, while the U.S. one-year interest rate is 7 percent. Over the next year, the peso depreciates by 12 percent. Do you think the forward rate overestimated the spot rate one year ahead in this case? Explain.

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ANSWER: A quoted forward rate for the Mexican peso would contain ...

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