Suppose annual inflation rates in the U.S.and Mexico are expected to be 6% and 80%,respectively,over the next several years.If the current spot rate for the Mexican peso is $.005,then the best estimate of the peso's spot value in 3 years is

Question

Quizplus · Accepted Answer

We can use the formula for calculating the expected future spot rate:

Future Spot Rate = Spot Rate * ((1 + Foreign Interest Rate) / (1 + Domestic Interest Rate))^Time

Plugging in the given values, we get:

Future Spot Rate = 0.005 * ((1 + 0.8) / (1 + 0.06))^3
Future Spot Rate = 0.005 * 7.8536
Future Spot Rate = 0.03927

Therefore, the best estimate for the peso's spot value in 3 years is $0.00102, which is choice D.

Suppose Annual Inflation Rates in the U