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1. Suppose that on January 1 a firm in Mexico borrows $20 million from Citibank (USA) for one year at 8.00% interest per annum. During the year U.S. inflation is 2.00% and Mexican inflation is 12.00%. The loan was taken when the spot rate was Peso 3.40/US$. At the end of the one year loan period the exchange rate was Peso 5.80/US$.
Based on the above information, what is the cost to the firm of the loan in Mexican peso's (percent)?
2.Howard borrows ¥5,000,000 for 6 months at an annual rate of 0.60% and uses the proceeds to invest in the U.S. money market at an annual rate of 4.50%. If the spot rate today is ¥115/$ and the spot rate in 6 months is ¥113/$ Howard's net proceeds will be:
3. Assume a nominal interest rate on one-year U.S. Treasury Bills of 4.60% and a real rate of interest of 2.50%. Using the Fisher Effect Equation, what is the expected rate of inflation in the U.S. over the next year?
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