Assume that interest rate parity holds. The Mexican interest rate is 50 percent, and the U.S. interest rate is 8 percent. Subsequently, the U.S. interest rate decreases to 7 percent. According to interest rate parity, the peso's forward ____ will ____.

Question

Assume that interest rate parity holds. The Mexican interest rate is 50 percent, and the U.S. interest rate is 8 percent. Subsequently, the U.S. interest rate decreases to 7 percent. According to interest rate parity, the peso's forward ____ will ____.​

Quizplus · Accepted Answer

According to interest rate parity, the forward rate reflects the interest rate differential between two countries. A decrease in the U.S. interest rate reduces the differential, leading to a smaller discount on the peso's forward rate, thus increasing the discount.

Assume That Interest Rate Parity Holds