The current indirect exchange rate is 12 pesos per dollar.The anticipated annual inflation rate is 5% in the United States and 5% in Mexico.If the cash inflow in pesos is 50,000 in one year,what are the 50,000 pesos worth in U.S.dollars after conversion from pesos to dollars using the forward exchange rate?

Question

Quizplus · Accepted Answer

To use the forward exchange rate, we need to calculate the future spot exchange rate first.

The anticipated spot exchange rate in one year can be calculated by adjusting the current exchange rate for the anticipated inflation rates in both countries:
Spot exchange rate in one year = Current exchange rate x (1 + US inflation rate)/(1 + Mexican inflation rate)
Spot exchange rate in one year = 12 x (1+0.05)/(1+0.05) = 12

This means that in one year, one dollar will buy 12 pesos.

To find out how many dollars are needed to convert 50,000 pesos into dollars, we divide 50,000 by the future spot exchange rate:
50,000/12 = $4,166.67

Therefore, the 50,000 pesos are worth $4,166.67 after conversion using the forward exchange rate. The best choice is B.

The Current Indirect Exchange Rate Is 12 Pesos Per Dollar