Say that the current direct exchange rate is $1.3382/£.The cash inflow in pounds is £75,000 in two years and the discount rate is 5%.During this time,the anticipated annual inflation rate is 2% per year in the United States and 5% per year in the United Kingdom.What is the present value (in U.S.dollars)of the £75,000 after conversion from pounds to dollars if you are using current and forward exchange rates?

Question

Quizplus · Accepted Answer

To find the present value in U.S. dollars, we first need to adjust the £75,000 for inflation in the UK, then convert it to dollars using the forward exchange rate, and finally discount it back to its present value using the U.S. inflation rate as the discount rate. The forward exchange rate can be estimated using the International Fisher Effect, which suggests that the exchange rate adjusts in accordance with the interest rate differentials between two countries, which in this case can be approximated by their inflation rates. The calculation involves several steps, including adjusting for inflation, calculating the forward exchange rate, converting the future value in pounds to dollars, and then discounting it to present value using the U.S. inflation rate. The correct answer reflects the outcome of these calculations, taking into account the given inflation rates and discount rate.

Say That the Current Direct Exchange Rate Is $1