Interest rate problem I am supposed to solve this problem: mexican interest rate is 28%, interest rate in the US is 7% and exchange rate is 7.5 Mexican pesos for 1 US dollar. If interest rate parity applies and we don't take political risks into consideration, what interest rate do we expect a year from now? Will the mexican peso increase or decrease in value? How will change it value in percents? My answer is: 1 US dollar = 2.24 Mexican pesos. Is it correct? Thanks

All else being equal, it should not matter whether we collect interest in dollars or pesos. If I have one dollar today, I can have $1.07$ dollars in a year. If I convert the dollar to pesos, I get $7.5$ pesos today so I can have $7.5\cdot 1.28=9.6$ pesos in a year. These should be of equal value, so in a year we expect the exchange rate to be $\frac {9.6}{1.07}\approx 8.97$ pesos to the dollar.

There is nothing in the data given to indicate how interest rates will change. We have to assume they are stable to do this analysis.