The treasurer of a company in Mexico borrowed $10,000 in dollars at a 12 percent rate when the exchange rate was 9 pesos to the dollar. His company paid the loan plus interest 1 year later, when the exchange rate was 9.5 pesos to the dollar.
A. What rate of interest was paid, based on the pesos received and paid by the treasurer?
B. Show how your result illustrates the interest rate parity theorem.