Suppose that one year ago the Government in Mexico has announced to keep the par value of the Peso against the US Dollar at 5, with the commitment to maintain the value of the Peso against the US dollar within a band of 3% of its par value. In the last two months, demand for US dollars in Mexico has been very strong, and the market value of the US Dollar has been exceeding the +3% upper band. The press reports that the Government and the Central Bank of Mexico are having a series of meetings to decide on a change on the par value of the Peso against the US Dollar. As a rational investor.... you should buy US Dollars today (for a maximum of Pesos 5.15), and sell them back for Pesos at the expected higher par value in the future you should sell US Dollars today (for a maximum of Pesos 5.15) and buy Dollars back at the expected higher par value in the future CH you should sell US Dollars today (for a maximum of Pesos 4.85), and buy Dollars back at the expected higher future par value you should buy US Dollars today for any price greater than 5 25 Pesos, and sell them in the future back for Pesos only if the Par Value is unchanged. If it is raised, hold on to your Dollars
Suppose that one year ago the Government in Mexico has announced to keep the par value of the Peso against the US Dollar at 5, with the commitment to maintain the value of the Peso against the US dollar within a band of 3% of its par value. In the last two months, demand for US dollars in Mexico has been very strong, and the market value of the US Dollar has been exceeding the +3% upper band. The press reports that the Government and the Central Bank of Mexico are having a series of meetings to decide on a change on the par value of the Peso against the US Dollar. As a rational investor.... you should buy US Dollars today (for a maximum of Pesos 5.15), and sell them back for Pesos at the expected higher par value in the future you should sell US Dollars today (for a maximum of Pesos 5.15) and buy Dollars back at the expected higher par value in the future CH you should sell US Dollars today (for a maximum of Pesos 4.85), and buy Dollars back at the expected higher future par value you should buy US Dollars today for any price greater than 5 25 Pesos, and sell them in the future back for Pesos only if the Par Value is unchanged. If it is raised, hold on to your Dollars
Economics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN:9781305506725
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Chapter19: International Finance And The Foreign Exchange Market
Section: Chapter Questions
Problem 5CQ
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Transcribed Image Text:Suppose that one year ago the Government in Mexico has announced to keep the par
value of the Peso against the US Dollar at 5, with the commitment to maintain the value
of the Peso against the US dollar within a band of 3% of its par value. In the last two
months, demand for US dollars in Mexico has been very strong, and the market value of
the US Dollar has been exceeding the +3% upper band. The press reports that the
Government and the Central Bank of Mexico are having a series of meetings to decide
on a change on the par value of the Peso against the US Dollar. As a rational investor....
you should buy US Dollars today (for a maximum of Pesos 5.15), and sell them back for
Pesos at the expected higher par value in the future
you should sell US Dollars today (for a maximum of Pesos 5.15) and buy Dollars back at the
expected higher par value in the future
CH
you should sell US Dollars today (for a maximum of Pesos 4.85), and buy Dollars back at the
expected higher future par value
you should buy US Dollars today for any price greater than 5 25 Pesos, and sell them in the
future back for Pesos only if the Par Value is unchanged. If it is raised, hold on to your Dollars
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