You are an Australian investor who is trying to calculate the present value (PV)of £15 million cash inflow that will occur one year from now. The spot exchange rate is $1.5742/£ and the forward rate is F₁ = $1.5682/£. The appropriate dollar discount rate for this cash flow is 1.05% and the appropriate £ discount rate is 1.45%. What is the present value of the £ cash inflow computed by first discounting the £ and converting them into dollars?

Question

Quizplus · Accepted Answer

The correct answer is A.The present value of the £ cash inflow computed by first discounting the £ and converting them into dollars is $23,275,505. This is calculated as follows:PV = £15,000,000 x (1 / 1.45%) x $1.5682/£PV = £15,000,000 x 0.9855 x $1.5682/£PV = £14,782,500 x $1.5682/£PV = $23,275,505

You Are an Australian Investor Who Is Trying to Calculate