Interest rate parity

the mexican direct forward exchange rate with the u.s dollar is higher than that indicated by interest rate parity. which of the following choices would not be part of a currency trader’s risk free profit trading strategy? a. sell USD at spot rate (USD/MXP) b. sell USD forward c. lend USD at the US interest rate d. borrow the mexican peso at the mexican interest rate please explain

A I don’t seem to have seen this topic in the new curriculam and my suspicion was that they have removed it from level 1. Can someone comfirm.? i suspect this Q is from last years practice Q

this has been moved to L 2

Yes this is L 2 program

It is level 2, but here is the explanation…If the forward rate higher (P/) than what is justified by IRP, an investor enter into the forward today, and receive more pesos in the future when the forward expires than what is justified by the respective country interest rates. In other words.....if spot is 5P/, rate = 5%, Peso rate = 4%, forward is one year, the price of the forward should be 4.95238P/. If it is higher (5.05 for example), I can borrow Pesos, convert at the spot, lend the , and have a guaranteed repatriation at the market forward rate of 5.05, when IRP states that I should only receive 4.95Peso per . Make sense?