Question: Assume that the Mexican peso currently trades at 15 pesos to the U.S. dollar. During the year U.S. inflation is expected to average 3%, while Mexican inflation is expected to average 5%.
What is the current value of one peso in terms of U.S. dollars? Given the relative inflation rates, what will the exchange rates be 1 year from now? Which currency is expected to appreciate and which currency is expected to depreciate over the next year?