You are expecting a payment of €630,000 three years from now.The risk-free rate of return is 3.4 percent in the United States and 2.9 percent in Euroland.The inflation rate is 2.5 percent in the United States and 2.1 percent in Euroland.Assume you can currently buy €82 for $100.How much will the payment 3 years from now be worth in U.S.dollars?

Question

Quizplus · Accepted Answer

First, we need to calculate the future value of €630,000 in three years, considering the inflation rate in Euroland:
FV = €630,000 * (1 + 2.1%)^3 = €694,122.75

Next, we need to convert this future value to U.S. dollars using the current exchange rate of €0.82/$1:
FV($) = €694,122.75 / 0.82 = $845,155.49

Finally, we need to discount this future value to the present using the risk-free rate of return in the United States:
PV = $845,155.49 / (1 + 3.4%)^3 = $779,932.89, which is closest to option B.

You Are Expecting a Payment of €630,000 Three Years from Now.The