The Mexican peso has weakened considerably relative to the dollar, and you are trying to decide whether this is a good time to invest in Mexico. Suppose the current exchange rate of the Mexican peso relative to the U.S. dollar is MXN9.5/USD
Your investment advisor at Goldman Sachs argues that the peso will lose 15% of its value relative to the dollar over the next year. What is Goldman Sachs's forecast of the exchange rate in 1 year?
One way to think of this is to say that the investment advisor is referring to the fact that the Mexican peso price of the dollar will be 15% higher next year. In this case, the forecast of the MXN/USD exchange rate in year 1
MXN9.5/USD 1.15 = MXN 10.925/USD
A 15% loss of value of the Mexican peso versus the U.S. dollar technically means that dollar price of the peso is 15% lower. We know that the current USD price of the peso is
1 / (MXN9.5/USD) = USD0.105263/MXN
If this exchange rate falls by 15%, the new exchange rate will be
0.85 USD0.105263/MXN = USD0.089474/MNX
In this case the forecast for the future exchange rate measured in pesos per dollar is
1 / (USD0.089474/MXN) = MXN11.1765/USD
The difference arises because the simple percentage change in the exchange rate depends on how the exchange rate is quoted.
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