Say that the current indirect exchange rate is 12 pesos per dollar. The cash inflow in pesos is 100,000 in two years and the discount rate is 10%. 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

The present value is calculated by first adjusting the future cash flow for inflation and then discounting it to the present value. The forward exchange rate is adjusted for the inflation differential between the two countries. The present value in pesos is calculated using the formula: PV = FV / (1 + discount rate)^n. Then, the forward exchange rate is calculated using the formula: Forward rate = Current rate * (1 + inflation rate in Mexico) / (1 + inflation rate in the US). Finally, the present value in dollars is found by converting the present value in pesos using the forward exchange rate.

Say That the Current Indirect Exchange Rate Is 12 Pesos