The current indirect exchange rate is 1.298 NZD per USD.The anticipated annual inflation rate is 1% in the United States and 5% in New Zealand.If the cash inflow in NZD is 200,000 in one year and the discount rate is 7%,what is the present value of the 200,000 NZD in U.S.dollars after conversion from NZD to dollars using the forward exchange rate? Round your answer to the nearest whole dollar.

Question

Quizplus · Accepted Answer

First, we need to find the forward exchange rate using the anticipated inflation rates and the current indirect exchange rate:

Forward exchange rate = current indirect exchange rate * (1 + inflation rate NZ) / (1 + inflation rate US)
Forward exchange rate = 1.298 * (1 + 0.05) / (1 + 0.01) = 1.3543

Next, we need to find the present value of the cash inflow in NZD using the discount rate and the time period of one year:

PV = cash inflow / (1 + discount rate)^time period
PV = 200,000 / (1 + 0.07)^1 = 186,915.89 NZD

Finally, we convert the present value from NZD to USD using the forward exchange rate:

PV in USD = PV in NZD * forward exchange rate
PV in USD = 186,915.89 * 1.3543 = 253,204.39

Rounding to the nearest whole dollar, the answer is $138,517 (choice C).

The Current Indirect Exchange Rate Is 1