esA U.S. firm holds an asset in Great Britain and faces the following scenario:rawProbabilitySpot ratePState 125%1$ 2.50££1,800$4,500Multiple ChoiceState 250%$ 2.000.0200£2,250$4,500The variance of the exchange rate is$State 325%tA1.60£2,812.504,500where,p*= Pound sterling price of the asset held by the U.S. firmP= Dollar price of the same asset£

The variance of a portfolio measures the dispersion or spread of the portfolio's returns around its…

A U.S. firm holds an asset in Great Britain and faces the following scenario: Probability Spot rate P P State 1 State 2 25% 50% $2.50 £ £1,800 $4,500 $ 2.00 £ £2,250 $4,500 $ The variance of the exchange rate is $ State 3 25% £2,812.50 4,500 LA 1.60 £ where, P = Pound sterling price of the asset held by the U.S. firm P= Dollar price of the same asset

A U.S. firm holds an asset in Great Britain and faces the following scenario: Probability Spot rate P P State 1 State 2 25% 50% $2.50 £ £1,800 $4,500 $ 2.00 £ £2,250 $4,500 $ The variance of the exchange rate is $ State 3 25% £2,812.50 4,500 LA 1.60 £ where, P = Pound sterling price of the asset held by the U.S. firm P= Dollar price of the same asset

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Lakonishok Equipment has an investment opportunity in Europe. The project costs €15,200,000 and is expected to produce cash flows of €3, 800,000 in Year 1, €4, 800,000 in Year 2, and €5, 200,000 in Year 3. The current spot exchange rate is $.83/€ and the current risk - free rate in the United States is 2.6 percent, compared to that in euroland of 2.1 percent. The appropriate discount rate for the project is estimated to be 11 percent, the U.S. cost of capital for the company. In addition, the subsidiary can be sold at the end of three years for an estimated €9, 700,000. What is the NPV of the project in U.S. dollars? (Do not round intermediate calculations and enter your answer in dollars, not in millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)
The following spot FX rates were reported: Japanese Yen British Pound Australian Dollar US Dollar 0.010267 1.616500 0.957900 The exchange rates indicate the number of US dollars necessary to purchase one unit of the foreign currency. From the perspective of a US investor, are the preceding FX rates direct or indirect quotations? How much of each of the foreign currencies is needed to buy one US dollar?
9
A U.S. firm holds an asset in Israel and faces the following scenario: Probability Spot rate Pº O121.971 12,898.00 1,289.80 State 1 O-52.6316 40% $ IS 0.30 /IS 1,000 State 2 35% $ IS 0.20 /IS 2,500 State 3 25% Where P= Israeli shekel (IS) price of the asset held by the U.S. firm. The "exposure" (i.e.. the regression coefficient beta) is $ 0.15 /IS IS 1.500
A U.S. firm holds an asset in Great Britain and faces the following scenario: State State 2 State 3 1 Probability 25% 50% 25% Spot rate $2.2/E $2/£ $1.8/E P" £3000 £2500 £2000 $6600 $5000 $3600 P where, P-Pound sterling price of the asset held by the U.S. firm P-Dollar price of the same asset The firm should the foreign currency risk. (buy/sell) forward of E at the prevailing 1-year forward price to hedge
Lakonishok Equipment has an investment opportunity in Europe. The project costs €18,406,730 and is expected to produce cash flows of €3,681,369 in Year 1, €4,992,682 in Year 2, and €6,337,782 in Year 3. The current spot exchange rate is $1.23/€ and the current risk-free rate in the United States is 3.71%, compared to that in Europe of 3.03%. The appropriate discount rate for the project is estimated to be 10.55%, the U.S. cost of capital for the company. In addition, the subsidiary can be sold at the end of three years for an estimated €12,529,609. What is the NPV of the project?
Assume a risk-free asset in the U.S. is currently yielding 2.7 percent while a Canadian risk-free asset is yielding 2.8 percent and the current spot rate is Can$1.2849 = $1. What is the approximate 6-month forward rate if interest rate parity holds? Can$1.2855 Can$1.2838 Can$1.2843 Can$1.2862 Can$1.2836
Lakonishok Equipment has an investment opportunity in Europe. The project costs €20,065,563 and is expected to produce cash flows of €3,524,370 in Year 1, €4,549,121 in Year 2, and €5,590,740 in Year 3. The current spot exchange rate is $1.38/€ and the current risk-free rate in the United States is 3%, compared to that in Europe of 3.08%. The appropriate discount rate for the project is estimated to be 11.07%, the U.S. cost of capital for the company. In addition, the subsidiary can be sold at the end of three years for an estimated €13,733,917. What is the NPV of the project?
Problem 19-4 (Algo) Required: Suppose a U.S. investor wishes to invest in a British firm currently selling for £33 per share. The investor has $66,000 to invest, and the current exchange rate is $2/£. Consider three possible prices per share at £31, £36, and £41 after 1 year. Also, consider three possible exchange rates at $1.60/£, $2/£, and $2.40/£ after 1 year. Calculate the standard deviation of both the pound- and dollar- denominated rates of return if each of the nine outcomes (three possible prices per share in pounds times three possible exchange rates) is equally likely. (Do not round intermediate calculations. Round your percentage answers to 2 decimal places.) X Answer is complete but not entirely correct. Standard deviation of pound-denominated return Standard deviation of dollar-denominated return 12.37 19.68 %
Lakonishok Equipment has an investment opportunity in Europe. The project costs €14,750,000 and is expected to produce cash flows of €3,350,000 in Year 1, €4,350,000 in Year 2, and €4,750,000 in Year 3. The current spot exchange rate is $.83/€ and the current risk-free rate in the United States is 3 percent, compared to that in euroland of 2.2 percent. The appropriate discount rate for the project is estimated to be 10 percent, the U.S. cost of capital for the company. In addition, the subsidiary can be sold at the end of three years for an estimated €9,250,000. What is the NPV of the project in U.S. dollars? (Round 2 decimal places) NPV : S

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