The spot exchange rate for the Mexican peso is 0.114 CAD/MXN,and the one-year forward rate is 0.104 CAD/MXN.If the one-year Canadian interest rate is 3.5% and the one-year Mexican interest rate is 9.0%,what is the credit spread on Mexican one-year bonds?

Question

Quizplus · Accepted Answer

The credit spread is the difference between the interest rates, which is 9.0% - 3.5% = 5.5%. However, the forward rate indicates an expected depreciation of the peso, which accounts for 1% of the spread, leaving a credit spread of 4.5%.

The Spot Exchange Rate for the Mexican Peso Is 0