-Refer to Exhibit T13.1. Assume the international parity conditions hold. The current spot rate is S₀^£/€ = £2/€. If i^£ = 7% and i^€ = 5%, what is NPV^£?

Question

Quizplus · Accepted Answer

The NPV in pounds can be calculated using the formula for the International Fisher Effect, which states that the future spot rate is affected by the interest rate differential between two countries. Given the current spot rate of £2/€, an interest rate of 7% in the UK, and an interest rate of 5% in the Eurozone, the expected future spot rate can be calculated. However, to directly calculate NPV, we would typically need more information about the cash flows involved. Since the question assumes international parity conditions hold and provides interest rates, it suggests using these rates to adjust the current spot rate or to calculate the present value of future cash flows. Without the specific formula or cash flows provided in the question, the correct answer involves understanding that the NPV calculation would incorporate the interest rate differential, the current spot rate, and possibly the expected future cash flows. Given the options provided and assuming a standard approach to calculating NPV with international parity conditions, the correct answer is selected based on the information that would typically be used in such a calculation, which involves adjusting for interest rate differentials and possibly expected cash flows in the given currencies.