Suppose that the invester of GMO has an extra cash reserve of $700,000 to invest in Mexico. The expected inflation rate is 1.29% in US and 3.37% in Mexico. The expected interest rate is 1.49% per year in the United States and 6.47% per year in Mexico. Currently, the nominal spot exchange rate is 19.780 Pesos per dollar and the nominal one-year forward rate is 19.790 pesos per dollar. The future spot exchange rate is 19.680 Pesos per US $1. Assess how he can construct an arbitrage portfolio based on appropriate calculations.

Suppose that the invester of GMO has an extra cash reserve of $700,000 to invest in Mexico. The expected inflation rate is 1.29% in US and 3.37% in Mexico. The expected interest rate is 1.49% per year in the United States and 6.47% per year in Mexico. Currently, the nominal spot exchange rate is 19.780 Pesos per dollar and the nominal one-year forward rate is 19.790 pesos per dollar. The future spot exchange rate is 19.680 Pesos per US $1. Assess how he can construct an arbitrage portfolio based on appropriate calculations.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter22: International Financial Management

Section: Chapter Questions

Problem 2P

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