If the interest rate on a U.S.one-year bond is 1%,the interest rate on a Mexican one-year bond is 5%,and investors expect the dollar to appreciate by 1% versus the peso,what is the currency premium for U.S.investors to hold Mexican pesos?

Question

Quizplus · Accepted Answer

The currency premium for U.S. investors to hold Mexican pesos is calculated by taking the difference between the interest rates (5% - 1% = 4%) and adjusting for the expected appreciation of the dollar versus the peso (-1%). This results in a net premium of 3% (4% - 1% = 3%).

If the Interest Rate on a U