If the rate of return is 3 percent in Mexico and 1 percent in Canada, the

Question

Quizplus · Accepted Answer

The expectation that the Mexican peso will depreciate against the Canadian dollar by 2 percent is based on the interest rate parity theory, which suggests that the difference in interest rates between two countries will be equal to the expected depreciation or appreciation of their exchange rates. Since Mexico has a higher interest rate (3%) compared to Canada (1%), it implies that investors expect the Mexican peso to depreciate against the Canadian dollar by the difference in these rates (2%) to prevent arbitrage opportunities.

If the Rate of Return Is 3 Percent in Mexico