Question

A US investor is considering investing in Mexico. The exchange rate today is $1 US buys 7.5 Pesos, the Mexican interest rate is 12%, and the investor expects that the future exchange rate will be $1 US buys 6.5 Pesos. Then what is the future value of a $100 investment, in US dollars?

Answer 1

Answer:

The future value of the investment in a year will be 129.23 dollars

Explanation:

We will convert the US dollars to Mexican Pesos

100 x 7.5 = 750

Then, we will apply the interest rate:

$Principal (1+r) = Amount$

750 x (1 + 0.12) = Amount

750 x 1.12 = 840

Now we convert the future value of the investment at the expected rate:

1 dollar = 6.5 pesos

We got 840 pesos

840/ 6.5 = 129,23 dollars