A U.S.-based MNC, invests 5,000,000 Argentine pesos for a one-year period at a n

Question

A U.S.-based MNC, invests 5,000,000 Argentine pesos for a one-year period at a nominal interest rate of 12 percent. The spot rate of the peso is $.049 at the time of the investment. The spot rate of the peso in one year is $.041. (1) Has the peso appreciated or depreciated over the 1-year period? (2) what is the dollar amount of the initial investment? (3) what is the dollar value of the investment after one year?
A U.S.-based MNC, invests 5,000,000 Argentine pesos for a one-year period at a nominal interest rate of 12 percent. The spot rate of the peso is $.049 at the time of the investment. The spot rate of the peso in one year is $.041. (1) Has the peso appreciated or depreciated over the 1-year period? (2) what is the dollar amount of the initial investment? (3) what is the dollar value of the investment after one year?
A U.S.-based MNC, invests 5,000,000 Argentine pesos for a one-year period at a nominal interest rate of 12 percent. The spot rate of the peso is $.049 at the time of the investment. The spot rate of the peso in one year is $.041. (1) Has the peso appreciated or depreciated over the 1-year period? (2) what is the dollar amount of the initial investment? (3) what is the dollar value of the investment after one year?

Explanation / Answer

1.

Spot rate now ($/peso) = $0.049

Spot rate after one year($/peso) = $0.041

Since $ is appreciating,hence Peso is depreciating against $ over one year.

2.

Exposure = 5,000,000 Argentine pesos

Spot rate now ($/peso) = $0.049

$ amount of investment = 5,000,000 * 0.049 = $2,45,000

3.

Exposure = 5,000,000 Argentine pesos

Spot rate now ($/peso) = $0.041

$ amount of investment = 5,000,000 * 0.041 = $2,05,000

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