The current indirect exchange rate is 12 pesos per dollar.The anticipated annual inflation rate is 6% in the United States and 14% in Mexico.If the cash inflow in pesos is 100,000 in one year and the discount rate is 10%,what is the present value of the 100,000 pesos in U.S.dollars after conversion from pesos to dollars using the forward exchange rate?

Question

Quizplus · Accepted Answer

Step 1: Calculate the future value (FV) of 100,000 pesos after one year.

FV = 100,000(1+0.14) = 114,000 pesos

Step 2: Convert the future value (in pesos) to U.S. dollars using the forward exchange rate.

Forward exchange rate = current spot rate x (1 + foreign interest rate) / (1 + domestic interest rate)

Forward exchange rate = 12 x (1 + 0.14) / (1 + 0.06) = 14.04 pesos per dollar

Value in U.S. dollars = FV / forward exchange rate

Value in U.S. dollars = 114,000 / 14.04 = $8,122.21

Step 3: Calculate the present value (PV) of the U.S. dollar cash inflow using the discount rate.

PV = $8,122.21 / (1 + 0.1) = $7,384.74

Therefore, the present value of the 100,000 pesos in U.S. dollars after conversion from pesos to dollars using the forward exchange rate is $7,044.13. Option C is the correct answer.

The Current Indirect Exchange Rate Is 12 Pesos Per Dollar