The Mexican one-year interest rate is 27 percent, while the U.S. one-year interest rate is 9 percent. If a U.S. firm creates a one-year deposit in Mexico, the Mexican peso would have to ____ against the U.S. dollar by ____ in order to make that investment have an effective yield that is achievable in the U.S.

Question

Quizplus · Accepted Answer

The Mexican peso would need to depreciate by 14% to equalize the effective yield with the U.S. rate. The difference in interest rates is 18% (27% - 9%), and to offset this, the peso must depreciate by 14% to make the effective yield in Mexico equal to the U.S. yield.

The Mexican One-Year Interest Rate Is 27 Percent, While the U.S