Question

The current MXN/CHF spot exchange rate is 28.4. The MXN inflation rate is 4.3%, and the CHF inflation rate is 0.6%. If you are a Mexican firm with a MXN cost of capital for foreign projects of 11%, what is the PV (in MXN) of a payment of 9M CHF 1 years from today?

Answer 1

The forward exchange rate for 1 year is the spot rate * (1+domestic inflation rate)/(1+foreign inflation rate)= 28.4*(1+0.043)/(1+0.006) = 29.444

In the given currency pair MXN is the base currency. This means that i can get 28.4 CHF in exchange for 1 MXN. So as per the forward rate I can get 29.444 CHF for 1MXN. As the payment due is in CHF, we will need to convert the CHF to MXN to understand the PV cost in MXN. The cost of 1 CHF in forward rate is 1/ 29.444.

The discount rate provided is the cost of capital for foreign projects. So we need to discount the 90000000 by 11%. This would give us the CHF PV.

90000000/1.11 = 81081081.1 CHF

This is the equivalent of 81081081.1/29.444 = 2753738.66 MXN