It can borrow pesos at 11% and can use peso revenues to be received over the year to repay the loan. Alternatively, it can borrow dollars at 6%. Interest rate parity exists.

Mizner, Inc., is a U.S. based MNC with a subsidiary in Mexico. Its Mexican subsidiary needs a one year loan of 10 million pesos for operating expenses. It can borrow pesos at 11% and can use peso revenues to be received over the year to repay the loan. Alternatively, it can borrow dollars at 6%. Interest rate parity exists. The forward rate of the peso is expected to overestimate the spot rate of the peso in one year. Should the subsidiary borrow pesos or dollars?

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