A French firm is considering a one-year investment in the United Kingdom with a pound-denominated rate of return of i_£ = 15%.The firm's local cost of capital is i_€ = 10%.The project costs £1,000 and will return £1,150 at the end of one year.The current exchange rate is €2.00 = £1.00.
Suppose that the bank of England is considering either tightening or loosening its monetary policy.It is widely believed that in one year there are only two possibilities:
S₁ (€/£)= €2.20 per £
S₁ (€/£)= €1.80 per £
Following revaluation,the exchange rate is expected to remain steady for at least another year.
The CFO who has a CFA notices the optionality in starting this project today.He asks you to comment and outline your valuation strategy.

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The Answer of A French firm is considering a one-year investment in the United Kingdom with a pound-denominated rate of return of i_£ = 15%.The firm's local cost of capital is i_€ = 10%.The project costs £1,000 and will return £1,150 at the end of one year.The current exchange rate is €2.00 = £1.00. Suppose that the bank of England is considering either tightening or loosening its monetary policy.It is widely believed that in one year there are only two possibilities: S₁ (€/£)= €2.20 per £ S₁ (€/£)= €1.80 per £ Following revaluation,the exchange rate is expected to remain steady for at least another year. The CFO who has a CFA notices the optionality in starting this project today.He asks you to comment and outline your valuation strategy.

A French Firm Is Considering a One-Year Investment in the United