The current indirect exchange rate is 18 pesos per dollar.The anticipated annual inflation rate is 1% in the United States and 4% in Mexico.If the cash inflow in pesos is 100,000 in one year,what are the 100,000 pesos worth in U.S.dollars after conversion from pesos to dollars using the forward exchange rate?

Question

Quizplus · Accepted Answer

First, we need to calculate the forward exchange rate based on the anticipated inflation rates:

Forward exchange rate = spot exchange rate * (1 + domestic interest rate) / (1 + foreign interest rate)
Forward exchange rate = 18 * (1 + 0.04) / (1 + 0.01)
Forward exchange rate = 18.288

Now, we can convert the 100,000 pesos cash inflow to U.S. dollars using the forward exchange rate:

Cash inflow in U.S. dollars = cash inflow in pesos / forward exchange rate
Cash inflow in U.S. dollars = 100,000 / 18.288
Cash inflow in U.S. dollars = $5,395.30

Therefore, the best choice is B, which is the closest answer to $5,395.30.

The Current Indirect Exchange Rate Is 18 Pesos Per Dollar