The current indirect exchange rate is 21 pesos per dollar.The cash inflow in pesos is 100,000 in two years and the discount rate is 9%.During this time,the anticipated annual inflation rate is 6% in the United States and 14% in Mexico.What is the present value of the 100,000 pesos in U.S.dollars after conversion from pesos to dollars if you are using current and forward exchange rates?

Question

Quizplus · Accepted Answer

First, calculate the future value of the 100,000 pesos in two years with the given inflation rates:

100,000 * (1 + 0.14)^2 = 156,240 pesos

Then, convert the future value to dollars using the current and forward exchange rates:

Current exchange rate: 156,240 / 21 = $7,440
Forward exchange rate: 156,240 / (1 + 0.06)^2 / 21 = $7,605.21

Now, we can calculate the present value of both options using the discount rate of 9%:

PV(current) = $7,440 / (1 + 0.09)^2 = $5,873.73
PV(forward) = $7,605.21 / (1 + 0.09)^2 = $5,978.94

Therefore, the present value of the 100,000 pesos in U.S. dollars after conversion is $3,465.21, which is the difference between the PVs: PV(forward) - PV(current).

The Current Indirect Exchange Rate Is 21 Pesos Per Dollar