Question

the 1 year forward rate on the Mexican Peso is $0.051/1 mxn and the current spot rate on the Mexican Peso is $0.053/1MAN. How is it possible that the bank can offer to sell Mexican Peso in one year for less than what the Mexican Peso is worth today?

Answer 1

Forward rates are dependent on interest rates in both the countries.

Implied forward rate = Spot rate x (1+interest rate in quoted currency) / (1+interest rate in base currency)

The currency with higher interest rate depreciates.

In above question, dollar is appreciating and mexican peso is depreciating. This can be only possible, if interest rates in US and lower than interest rates in Mexico.

Bank can offer to sell Mexican Peso in one year for less than what the Peso is worth today as interest rate in Mexico must be higher than the interest rate in US.

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