Deriving forecasts of the future spot rate. As of today, assume the following information is available:
|
|
UK
|
Mexico
|
|
Real rate of interest required by investors
|
2%
|
2%
|
|
Nominal interest rate
|
11%
|
15%
|
|
Spot rate
|
-
|
£0.05
|
|
One-year forward rate
|
-
|
£0.049
|
a. Use the forward rate to forecast the percentage change in the Mexican peso over the next year.
b. Use the differential in expected inflation to forecast the percentage change in the Mexican peso over the next year.
c. Use the spot rate to forecast the percentage change in the Mexican peso over the next year.