The Mexican one-year interest rate is 9 percent, while the U.S. one-year interest rate is 3 percent. Assume that interest rate parity exists. If a U.S. uses the forward rate to forecast the exchange rate of the peso in one year, the expected effective yield from investing in a one-year deposit in Mexico is:

Question

The Mexican one-year interest rate is 9 percent, while the U.S. one-year interest rate is 3 percent. Assume that interest rate parity exists. If a U.S. uses the forward rate to forecast the exchange rate of the peso in one year, the expected effective yield from investing in a one-year deposit in Mexico is:​

Quizplus · Accepted Answer

Interest rate parity implies that the difference in interest rates between two countries is offset by the forward exchange rate. Therefore, the expected effective yield for a U.S. investor using the forward rate to invest in Mexico would be equal to the U.S. interest rate of 3 percent.

The Mexican One-Year Interest Rate Is 9 Percent, While the U.S