Mexican Peso Essay
The Mexican peso has weakened considerably relative to the dollar, and you are trying to decide whether this is a good time to invest in Mexico. Suppose the current exchange rate of the Mexican peso relative to the U.S. dollar is MXN9.5/USD. Your investment advisor at Goldman Sachs argues that the peso will lose 15% of its value relative to the dollar over the next year. What is Goldman Sachs’s forecast of the exchange rate in 1 year?
Answer:
If the value of peso will fall 15% next year;
0.1052USD x (1 - 0.15) = 0.1052 x 0.85 = 0.0894 USD/MXN (next 1 year)
On the other side Mexican Peso will be:
9.5 MXN/USD divided by 1 – 0.15 = 11.17 MXN/USD (next 1 year)
2. Consider the following spot and forward rates for the yen–euro exchange rates: …show more content…
Answer: China has been unusual in recent years in having a surplus on both, which explained the very strong growth of foreign reserves. But the capital account surplus has now become a small deficit. This is consistent with the view that the foreign reserves, which have stopped growing, might shrink in future. It is also a signal of capital flight from China – the rich taking their money out for fear of the future. How do developing countries typically manage to keep currencies pegged at values that are too high? Who benefits from such an overvalued currency? Who is hurt by an overvalued currency?
Answer: According to the this situation, there will surplus of the local currency than foreign currencies. Because the exchange rate overvalues the local currency on the foreign exchange market, most people want to convert the local currency to the central bank and receive foreign currency in order to invest them abroad. If this action persists, central bank will be out of foreign currencies and that’s going to bank harmful effect to developing country. In order to avoid that, central bank should control the foreign exchange market and control cash flow, manage who gets access to it. Another way that developing country might use local currencies are inconvertible or limited amount, it will maintain the system flow
Answer:
If the value of peso will fall 15% next year;
0.1052USD x (1 - 0.15) = 0.1052 x 0.85 = 0.0894 USD/MXN (next 1 year)
On the other side Mexican Peso will be:
9.5 MXN/USD divided by 1 – 0.15 = 11.17 MXN/USD (next 1 year)
2. Consider the following spot and forward rates for the yen–euro exchange rates: …show more content…
Answer: China has been unusual in recent years in having a surplus on both, which explained the very strong growth of foreign reserves. But the capital account surplus has now become a small deficit. This is consistent with the view that the foreign reserves, which have stopped growing, might shrink in future. It is also a signal of capital flight from China – the rich taking their money out for fear of the future. How do developing countries typically manage to keep currencies pegged at values that are too high? Who benefits from such an overvalued currency? Who is hurt by an overvalued currency?
Answer: According to the this situation, there will surplus of the local currency than foreign currencies. Because the exchange rate overvalues the local currency on the foreign exchange market, most people want to convert the local currency to the central bank and receive foreign currency in order to invest them abroad. If this action persists, central bank will be out of foreign currencies and that’s going to bank harmful effect to developing country. In order to avoid that, central bank should control the foreign exchange market and control cash flow, manage who gets access to it. Another way that developing country might use local currencies are inconvertible or limited amount, it will maintain the system flow