Question Details

Why do you think the bid/ask spread is higher for pesos 



1.	Measuring Effects on Exchange Rates. Tarheel Co. plans to determine how changes in U.S. and Mexican real interest rates will affect the value of the U.S. dollar.  (See Appendix C.)

	a.	Describe a regression model that could be used to achieve this purpose.  Also explain the expected sign of the regression coefficient.

b.	If Tarheel Co. thinks that the existence of a quota in particular historical periods may have affected exchange rates, how might this be accounted for in the regression model?

2. Factors Affecting Exchange Rates. Mexico tends to have much higher inflation than the United States and also much higher interest rates than the United States.  Inflation and interest rates are much more volatile in Mexico than in industrialized countries. The value of the Mexican peso is typically more volatile than the currencies of industrialized countries from a U.S. perspective; it has typically depreciated from one year to the next, but the degree of depreciation has varied substantially. The bid/ask spread tends to be wider for the peso than for currencies of industrialized countries. 

	a.	Identify the most obvious economic reason for the persistent depreciation of the peso.

b.	High interest rates are commonly expected to strengthen a country- currency because they can encourage foreign investment in securities in that country, which results in the exchange of other currencies for that currency.  Yet, the peso- value has declined against the dollar over most years even though Mexican interest rates are typically much higher than U.S. interest rates.  Thus, it appears that the high Mexican interest rates do not attract substantial U.S. investment in Mexico- securities.  Why do you think U.S. investors do not try to capitalize on the high interest rates in Mexico?

c.	Why do you think the bid/ask spread is higher for pesos than for currencies of industrialized countries?  How does this affect a U.S. firm that does substantial business in Mexico?


Business Management Assignment Help, Business Management Homework help, Business Management Study Help, Business Management Course Help