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Answer: + 8.08% per annum
Using covered interest parity / IRP for a FX quote of **USD per MXN**: \[ F_0 = S_0 e^{(r_{USD} - r_{MXN})T} \] So, \[ \frac{F_0}{S_0}=e^{(r_{USD}-r_{MXN})T} \] Given: - \(S_0 = 0.0500\) - \(F_0 = 0.0490\) - \(T = 0.25\) \[ r_{USD}-r_{MXN} = \frac{\ln(0.0490/0.0500)}{0.25} \approx \frac{\ln(0.98)}{0.25} \approx -0.0808 \] Thus: \[ r_{MXN}-r_{USD} \approx +8.08\% \text{ per annum} \] So the Mexican short-term interest rate is about 8.08% higher than the U.S. rate.
Author: Manit Arora
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Question-717.1. Near the end of July, the settlement price for the August Mexican Peso Futures contract is MXN/USD $0.050 where USD is the quote currency and MXN is the base currency; i.e., USD $0.0500 per one Peso, or equivalently, 20.0 Pesos per one US dollar which would be represented by USD/MXN 20.0. If the November MXN/USD futures contract—which is three months (T = 0.25 years) forward—settlement price is $0.0490, and if we assume interest rates are expressed per annum with continuous compounding, then what does interest rate parity (IRP) predict for the difference between short-term interest rates in Mexico and the United States? (note: variation on Hull Problem 5.13).
A
No difference
B
C
D
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