What is the forward discount on pesos

Reference no: EM132152151

Question: The peso is the currency of Argentina. Suppose that the $/peso forward exchange rate, F, is exactly equal to traders' expectations for the value of the $/peso spot rate, E, in one year's time.

(a) If F = 1.20 and E = 1.25, what is the forward discount on pesos?

(b) Assuming that interest rate parity (IRP) holds, what would you expect to be true of the interest differential between one-year dollar deposits and one-year peso deposits, that is, R$ - Rpeso?

(c) Argentina has a long history of defaulting on its foreign debt. Do you think that the IRP condition is likely to hold for dollar- versus peso-denominated deposits? If not, do you think the interest differential R$ - Rpeso is likely to be greater or less than what is predicted by IRP?

Reference no: EM132152151

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