Deriving Forecasts of the Future Spot Rate
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Deriving forecasts of the future spot rate for US dollars and Mexico peso.
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As of today, assume the following information is available.
US Dollars Mexico
Rate of interest required by investors 2% 2%
Nominal interest rate 11% 15%
Spot Rate - $0.20
One year forward rate - $0.19
A) Use the forward rate to forecast the percentage change in the Mexican peso over the next year.
B) Use the differential in expected inflation to forecast the percentage change in the Mexican peso over the next year.
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