Mexico tends to have much higher inflation than the United States, as well as much higher interest rates.
Week 2 Analytical Application
Factors Affecting Exchange Rates
Mexico tends to have much higher inflation than the United States, as well as much higher interest rates. Inflation and interest rates are much more volatile in Mexico than in industrialized countries. The value of the Mexican peso is typically more volatile than the currencies of industrialized countries from a U.S. perspective; it has typically depreciated from one year to the next, but the degree of depreciation has varied substantially. The bid/ask spread tends to be wider for the peso than for currencies of industrialized countries.
a. Identify the most obvious economic reason for the persistent depreciation of the peso.
b. High interest rates are commonly expected to strengthen a country’s currency because they can encourage foreign investment in securities in that country, which results in the exchange of other currencies for that currency. Yet the peso’s value has declined against the dollar over most years, even though Mexican interest rates are typically much higher than U.S. interest rates. Thus it appears that the high Mexican interest rates do not attract substantial U.S. investment in Mexico’s securities. Why do you think U.S. investors do not try to capitalize on the high interest rates in Mexico?
c. Why do you think the bid/ask spread is higher for pesos than it is for currencies of industrialized countries? How does this affect a U.S. firm that does substantial business in Mexico? ATTACHMENT PREVIEW Download attachmentWeek 2 Analytical ApplicationFactors Affecting Exchange RatesMexico tends to have much higher inflation than the United States, as well as much higherinterest rates. Inflation and interest rates are much more volatile in Mexico than in industrializedcountries. The value of the Mexican peso is typically more volatile than the currencies ofindustrialized countries from a U.S. perspective; it has typically depreciated from one year to thenext, but the degree of depreciation has varied substantially. The bid/ask spread tends to bewider for the peso than for currencies of industrialized countries.a.Identify the most obvious economic reason for the persistent depreciation of thepeso.b.High interest rates are commonly expected to strengthen a country’s currencybecause they can encourage foreign investment in securities in that country, whichresults in the exchange of other currencies for that currency. Yet the peso’s value hasdeclined against the dollar over most years, even though Mexican interest rates aretypically much higher than U.S. interest rates. Thus it appears that the high Mexicaninterest rates do not attract substantial U.S. investment in Mexico’s securities. Whydo you think U.S. investors do not try to capitalize on the high interest rates inMexico?c.Why do you think the bid/ask spread is higher for pesos than it is for currencies ofindustrialized countries? How does this affect a U.S. firm that does substantialbusiness in Mexico?
Looking for a Similar Assignment? Order now and Get 10% Discount! Use Coupon Code "Newclient"
