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Lakeland, Inc., is a U.S.‑based MNC with a subsidiary in Mexico. Its Mexican subsidiary needs a one‑year loan of 10 million pesos for operating expenses. Since the Mexican interest rate is 40 percent, Lakeland is considering borrowing dollars, which it would convert to pesos to cover the operating expenses. By how much would the dollar have to appreciate against the peso to cause such a strategy to backfire? (The one‑year U.S. interest rate is 6%.)

Respuesta :

Answer:

The dollar have to apprentice 32% against the peso.

Explanation:

According to the scenario, computation of the given data are as follow:-

We can calculate the Expected Future Exchange Return by using following formula:-

Expected Future Exchange Return= 1 - (1 + Mexican Interest Rate) ÷ ( 1 + US Interest Rate)

= 1 - ( 1 + 0.4) ÷ ( 1 + 0.06 )

= 1 - 1.32

= 0.32 or 32%

According to the Analysis, the dollar have to apprentice 32% against the peso for the given strategy to backfire

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