| Description |
A Baywhite client has entered into a long six-month MXN/USD FX forward
contract—that is , an agreement to sell MXN and buy USD. The MXN/USD spot
exchange rate at inception is 19.8248 (MXN19.8248 = USD1), the six-month
MXN risk-free rate is 4.25%, and the six-month USD risk-free rate is 0.5%.
Baywhite’s market strategist predicts that the Mexican central bank (Banco de
Mexico) will surprise the market with a 50 bp short-term rate cut at its upcoming
meeting. Which of the following statements best describes how the client’s exist ing FX for ward contract will be impacted if this prediction is realized and other
parameters remain unchanged? |