Response to the following problem:
RP The 1-year risk-free interest rate in Mexico is 10 percent. The 1- year risk-free rate in the United States is 2 percent. Assume that interest rate parity exists. The spot rate of the Mexican peso is $.14.
a. What is the forward rate premium?
b. What is the 1-year forward rate of the peso?
c. Based on the international Fisher effect, what is the expected change in the spot rate over the next year?
d. If the spot rate changes as expected according to the IFE, what will be the spot rate in 1 year?
e. Compare your answers to (b) and (d) and explain the relationship.