Interest rate problem
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I am supposed to solve this problem: mexican interest rate is 28%, interest rate in the US is 7% and exchange rate is 7.5 Mexican pesos for 1 US dollar. If interest rate parity applies and we don't take political risks into consideration, what interest rate do we expect a year from now? Will the mexican peso increase or decrease in value? How will change it value in percents?
My answer is: 1 US dollar = 2.24 Mexican pesos. Is it correct? Thanks
economics
asked Dec 8 '18 at 22:14
PeterPeter
82
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add a comment |
$begingroup$
I am supposed to solve this problem: mexican interest rate is 28%, interest rate in the US is 7% and exchange rate is 7.5 Mexican pesos for 1 US dollar. If interest rate parity applies and we don't take political risks into consideration, what interest rate do we expect a year from now? Will the mexican peso increase or decrease in value? How will change it value in percents?
My answer is: 1 US dollar = 2.24 Mexican pesos. Is it correct? Thanks
economics
asked Dec 8 '18 at 22:14
PeterPeter
82
$endgroup$
add a comment |
$begingroup$
I am supposed to solve this problem: mexican interest rate is 28%, interest rate in the US is 7% and exchange rate is 7.5 Mexican pesos for 1 US dollar. If interest rate parity applies and we don't take political risks into consideration, what interest rate do we expect a year from now? Will the mexican peso increase or decrease in value? How will change it value in percents?
My answer is: 1 US dollar = 2.24 Mexican pesos. Is it correct? Thanks
economics
asked Dec 8 '18 at 22:14
PeterPeter
82
$endgroup$
I am supposed to solve this problem: mexican interest rate is 28%, interest rate in the US is 7% and exchange rate is 7.5 Mexican pesos for 1 US dollar. If interest rate parity applies and we don't take political risks into consideration, what interest rate do we expect a year from now? Will the mexican peso increase or decrease in value? How will change it value in percents?
My answer is: 1 US dollar = 2.24 Mexican pesos. Is it correct? Thanks
economics
economics
asked Dec 8 '18 at 22:14
PeterPeter
82
asked Dec 8 '18 at 22:14
PeterPeter
82
asked Dec 8 '18 at 22:14
PeterPeter
82
asked Dec 8 '18 at 22:14
PeterPeter
82
asked Dec 8 '18 at 22:14
PeterPeter
82
82
add a comment |
add a comment |
1 Answer
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All else being equal, it should not matter whether we collect interest in dollars or pesos. If I have one dollar today, I can have $1.07$ dollars in a year. If I convert the dollar to pesos, I get $7.5$ pesos today so I can have $7.5cdot 1.28=9.6$ pesos in a year. These should be of equal value, so in a year we expect the exchange rate to be $frac {9.6}{1.07}approx 8.97$ pesos to the dollar.
There is nothing in the data given to indicate how interest rates will change. We have to assume they are stable to do this analysis.
answered Dec 8 '18 at 22:25
Ross MillikanRoss Millikan
296k23198371
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$begingroup$
Is this solution possible? E*(1+it^*-1+it+1) and with numbers 10/75*(1.28-1.07+1)?
$endgroup$
– Peter
Dec 8 '18 at 23:50
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That is not correct. The change is a factor $frac {1.28}{1.07}$, not the difference. When the percentages are small the error will be small. The ratio is $1.196$ while your calculation gets $1.19$.
$endgroup$
– Ross Millikan
Dec 9 '18 at 0:47
add a comment |
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1 Answer
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$begingroup$
All else being equal, it should not matter whether we collect interest in dollars or pesos. If I have one dollar today, I can have $1.07$ dollars in a year. If I convert the dollar to pesos, I get $7.5$ pesos today so I can have $7.5cdot 1.28=9.6$ pesos in a year. These should be of equal value, so in a year we expect the exchange rate to be $frac {9.6}{1.07}approx 8.97$ pesos to the dollar.
There is nothing in the data given to indicate how interest rates will change. We have to assume they are stable to do this analysis.
answered Dec 8 '18 at 22:25
Ross MillikanRoss Millikan
296k23198371
$endgroup$
$begingroup$
Is this solution possible? E*(1+it^*-1+it+1) and with numbers 10/75*(1.28-1.07+1)?
$endgroup$
– Peter
Dec 8 '18 at 23:50
$begingroup$
That is not correct. The change is a factor $frac {1.28}{1.07}$, not the difference. When the percentages are small the error will be small. The ratio is $1.196$ while your calculation gets $1.19$.
$endgroup$
– Ross Millikan
Dec 9 '18 at 0:47
add a comment |
$begingroup$
All else being equal, it should not matter whether we collect interest in dollars or pesos. If I have one dollar today, I can have $1.07$ dollars in a year. If I convert the dollar to pesos, I get $7.5$ pesos today so I can have $7.5cdot 1.28=9.6$ pesos in a year. These should be of equal value, so in a year we expect the exchange rate to be $frac {9.6}{1.07}approx 8.97$ pesos to the dollar.
There is nothing in the data given to indicate how interest rates will change. We have to assume they are stable to do this analysis.
answered Dec 8 '18 at 22:25
Ross MillikanRoss Millikan
296k23198371
$endgroup$
$begingroup$
Is this solution possible? E*(1+it^*-1+it+1) and with numbers 10/75*(1.28-1.07+1)?
$endgroup$
– Peter
Dec 8 '18 at 23:50
$begingroup$
That is not correct. The change is a factor $frac {1.28}{1.07}$, not the difference. When the percentages are small the error will be small. The ratio is $1.196$ while your calculation gets $1.19$.
$endgroup$
– Ross Millikan
Dec 9 '18 at 0:47
add a comment |
$begingroup$
All else being equal, it should not matter whether we collect interest in dollars or pesos. If I have one dollar today, I can have $1.07$ dollars in a year. If I convert the dollar to pesos, I get $7.5$ pesos today so I can have $7.5cdot 1.28=9.6$ pesos in a year. These should be of equal value, so in a year we expect the exchange rate to be $frac {9.6}{1.07}approx 8.97$ pesos to the dollar.
There is nothing in the data given to indicate how interest rates will change. We have to assume they are stable to do this analysis.
answered Dec 8 '18 at 22:25
Ross MillikanRoss Millikan
296k23198371
$endgroup$
All else being equal, it should not matter whether we collect interest in dollars or pesos. If I have one dollar today, I can have $1.07$ dollars in a year. If I convert the dollar to pesos, I get $7.5$ pesos today so I can have $7.5cdot 1.28=9.6$ pesos in a year. These should be of equal value, so in a year we expect the exchange rate to be $frac {9.6}{1.07}approx 8.97$ pesos to the dollar.
There is nothing in the data given to indicate how interest rates will change. We have to assume they are stable to do this analysis.
answered Dec 8 '18 at 22:25
Ross MillikanRoss Millikan
296k23198371
answered Dec 8 '18 at 22:25
Ross MillikanRoss Millikan
296k23198371
answered Dec 8 '18 at 22:25
Ross MillikanRoss Millikan
296k23198371
answered Dec 8 '18 at 22:25
Ross MillikanRoss Millikan
296k23198371
296k23198371
$begingroup$
Is this solution possible? E*(1+it^*-1+it+1) and with numbers 10/75*(1.28-1.07+1)?
$endgroup$
– Peter
Dec 8 '18 at 23:50
$begingroup$
That is not correct. The change is a factor $frac {1.28}{1.07}$, not the difference. When the percentages are small the error will be small. The ratio is $1.196$ while your calculation gets $1.19$.
$endgroup$
– Ross Millikan
Dec 9 '18 at 0:47
add a comment |
$begingroup$
Is this solution possible? E*(1+it^*-1+it+1) and with numbers 10/75*(1.28-1.07+1)?
$endgroup$
– Peter
Dec 8 '18 at 23:50
$begingroup$
That is not correct. The change is a factor $frac {1.28}{1.07}$, not the difference. When the percentages are small the error will be small. The ratio is $1.196$ while your calculation gets $1.19$.
$endgroup$
– Ross Millikan
Dec 9 '18 at 0:47
$begingroup$
Is this solution possible? E*(1+it^*-1+it+1) and with numbers 10/75*(1.28-1.07+1)?
$endgroup$
– Peter
Dec 8 '18 at 23:50
$begingroup$
Is this solution possible? E*(1+it^*-1+it+1) and with numbers 10/75*(1.28-1.07+1)?
$endgroup$
– Peter
Dec 8 '18 at 23:50
$begingroup$
That is not correct. The change is a factor $frac {1.28}{1.07}$, not the difference. When the percentages are small the error will be small. The ratio is $1.196$ while your calculation gets $1.19$.
$endgroup$
– Ross Millikan
Dec 9 '18 at 0:47
$begingroup$
That is not correct. The change is a factor $frac {1.28}{1.07}$, not the difference. When the percentages are small the error will be small. The ratio is $1.196$ while your calculation gets $1.19$.
$endgroup$
– Ross Millikan
Dec 9 '18 at 0:47
add a comment |
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