Assume That a U

Multiple Choice

Assume that a U.S. firm can invest funds for one year in the U.S. at 12% or invest funds in Mexico at 14%. 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.