The current indirect exchange rate is 12 pesos per dollar. The anticipated annua

Question

The current indirect exchange rate is 12 pesos per dollar. The anticipated annual inflation rate is 6% in the United States and 14% in Mexico. If the cash inflow in pesos is 50,000 in one year, what are the 50,000 pesos worth in U.S dollars after conversion from pesos to dollars using the foreign exchange rate?

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Explanation / Answer

Earlier 12 Peso = 1$

Now after inflation rate

12 +14% of 12 Peso = $1 + 6% of 1 $

13.68 Peso = 1.06 $

Or 1 Peso = 0.0775 $

So 50000 Pesos = 50000* 0.0775 = $3875

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