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1 Nov 2018

Calculate a future interest rate given spot interest rates, using the Pure Expectations Theory

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Irving Heathcote
Irving HeathcoteLv2
3 Nov 2018

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a. Mexican interest rates are normally substantially higher than U.S. interest rates. What does this imply about the forward rate as a forecast of the future spot rate?

b. Does the forward rate reflect a forecast of appreciation or depreciation of the Mexican peso? Explain how the degree of the expected change implied by the forward rate forecast is tied to the interest rate differential.

c. Do you think that today’s forward rate or today’s spot rate of the peso would be a better forecast of the future spot rate of the peso.

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