Assume That Interest Rate Parity Holds

question 74

Multiple Choice

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?

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

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Definitions:

Expected Dividend

The forecasted amount of dividend payments that an investor anticipates receiving from investments in stocks.

Tracking Stock

A type of stock issued by a parent company that tracks the financial performance of a particular division or subsidiary without conferring ownership.

Dual-Class Shares

Dual-class shares are a type of stock structure where different classes of shares provide different rights, typically voting power, to shareholders.

Stock Valuation Model

A method or approach used to estimate the intrinsic value of a stock, helping investors decide whether to buy, sell, or hold the stock.