Chapter 6 in Class Problems-Solutions.docx - FNCE 4P05 In-class Problems-Set 3(Chapters 6 1 During 1995 the Mexican peso exchange rate rose from MXP

Chapter 6 in Class Problems-Solutions.docx - FNCE 4P05...

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FNCE 4P05 In-class Problems-Set 3 (Chapters 6) 1.During 1995, the Mexican peso exchange rate rose from MXP 5.33/USD to MXP7.64/USD. At the same time, US inflation was approximately 3% in contrast to Mexicaninflation of about 48.7%.a.By how much did the nominal value of the peso change during 1995? b.By how much did the real value of the peso change over this period? 2.Suppose that 3-month interest rates (annualized) in Japan and the US are 7% and 9%,respectively. If the spot rate is ¥142/$1 and the 90-day forward rate is ¥139/$1:a.Where would you invest? ,
¿ b.Where would you borrow? c.What arbitrage opportunity do these figures present?

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