You are a Canadian investor who is trying to calculate the present value of a 5
ID: 1175621 • Letter: Y
Question
You are a Canadian investor who is trying to calculate the present value of a 5 mil- lion EUR cash inflow that will occur one year in the future. The spot exchange rate is S- 1.25 CAD/EUR and the forward rate is F1-1.215 CAD/EUR. You estimate that the appropriate CAD discount rate for this cash flow is 4% and the appropriate EUR discount rate is 7%. a. What is the present value of the 5 million EUR cash inflow computed by firsto discounting the EUR and then converting it into CAD? converting the cash flow into CAD and then discounting? grated, based on your answers to parts (a) and (b)? b. What is the present value of the 5 million EUR cash inflow computed by first c. What can you conclude about whether these markets are internationally inte-Explanation / Answer
a: present value of EUR = 5 million x PVIF @ 7%, 1 year = 5 million x 0.9346 = 4.673 million
converting them into CAD = 4.673 x 1.25 = 5.8412 million
b : converting cash inflow into CAD = 5 million x 1.215 = 6.075 million
present value of CAD = 6.075 million x PVIF @ 4%, 1 year = 6.075 million x 0.9615 = 5.8413 million
c : YES, both the markets are internationally integrated as both answers in a and b matches
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