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What would the expected spot rate be

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(a) Tomorrow, Evergreen co. based in California, must pay 20 million Mexican pesos for imports from Mexico. Yesterday the spot rate for the peso was $0.05. Today the peso appreciated 4% against the dollar. Evergreen could send the payment today to avoid any further possible peso appreciation. However, observations from historical data show that whenever the peso appreciates against the dollar by more than 3%, it experiences a reversal of about 50% of that change on the following day. Given this forecast, Evergreen decides to wait to make its payment tomorrow. Assuming the forecast is true, would you consider this decision reasonable?

(b) The U.S inflation rate is expected to be 2.5% over the next 4 years while the German inflation rate is expected to be 3% over the same period. The spot rate for the euro is $1.25. What would the expected spot rate be in 4 years according to the PPP?

Reference no: EM132946100

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