Question

Suppose that 1 USD costs 9.5 Mexican pesos. Your financial advisor argues that peso will lose...

Suppose that 1 USD costs 9.5 Mexican pesos. Your financial advisor argues that peso will lose 15% of its value relative to the dollar over the next year. What are your advisor's forecast of the dollar price of Mexican peso in 1 year?

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Answer #1

Current rate:- 1 USD cost 9.5 Mexican pesos

Direct current quote:- Pesos/USD - 9.5

Firt we need to convert this into indirect quote ie. USD/Peso. That can be derived as 1/(Pesos/USD)

Idirect quote = USD/Peso = 1/9.5 = 0.1053 {this means that 1 pesos = 0.1053$ currently}

Peso looses 15%, so new value = 0.1053 x 85% = 0.08947 {this means that 1 pesos = 0.08947$ in 1 year}

Now lets convert it back to direct quote

Direct quote = Pesos/USD = 1/ (USD/Peso after 1 year) = 1 / 0.08947 = 11.18

So after 1 year 1 USD will cost 11.18 Mexican pesos

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