International Financial Management 2nd Edition by Geert Bekaert ,Robert Hodrick

Exercise 1

Chapeau Rouge has a Swiss project that will return either CHF300 million or CHF250 million per year of free cash flow indefinitely. Each of the possible CHF cash flows is equally likely. Chapeau Rouge's CHF discount rate for these cash flows is 13% per annum, the cost of the project is €1,100 million, and the current exchange rate is CHF1.67/EUR. Should Chapeau Rouge accept the project Suppose that Chapeau Rouge has a €400 million line of credit with its bank. Will Chapeau Rouge have trouble hedging the CHF cash flows