Assume That Interest Rate Parity Holds

question 21

Multiple Choice

Assume that interest rate parity holds. The U.S. five-year interest rate is 5 percent annualized, and the Mexican five-year interest rate is 8 percent 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?

• A) $.131
• B) $.226
• C) $.262
• D) $.140
• E) $.174

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