Arbitrage in Financial Markets
1. It costs 12.19 Mexican peso to buy $US1. Interest rates on one year bonds of the Mexican government are 4.3%. Interest rates on one year bonds of the US government are 0.13%. How many peso would you expect to be able to sell for $US1 using a forward contract that settles in one year?
2. What rate of depreciation or appreciation of the Mexican peso against the US$ must investors be anticipating over the next year, if expected returns on dollar- and peso-denominated assets are equal, given the facts of part (1)?
3. Explain the di erence between Covered and Uncovered Interest Parity Arbitrage. What risks does a US investor face when buying Mexican government bonds, and trying to exploit these arbitrage strategies?