Assume That a U

Multiple Choice

Assume that a U.S. firm can invest funds for one year in the United States at 12 percent or invest funds in Mexico at 14 percent. The spot rate of the peso is $.10 while the one-year forward rate of the peso is $.10. If U.S. firms attempt to use covered interest arbitrage, what forces should occur?

A) Spot rate of peso increases; forward rate of peso decreases.
B) Spot rate of peso decreases; forward rate of peso increases.
C) Spot rate of peso decreases; forward rate of peso decreases.
D) Spot rate of peso increases; forward rate of peso increases.