Market observes the “exchange rates” as of today:($1/$0)=0.95 , ($2/$0)=0.87 1. What is the implied interest rate between time t=0 and t=2 ? 2. Now there is a project with three certain cashflows: CF0=−$10MM CF1=$5MM CF2=$7MM What is NPV0? 3. How much is CF1 worth at t=2?

Market observes the “exchange rates” as of today:($1/$0)=0.95 , ($2/$0)=0.87 1. What is the implied interest rate between time t=0 and t=2 ? 2. Now there is a project with three certain cashflows: CF0=−$10MM CF1=$5MM CF2=$7MM What is NPV0? 3. How much is CF1 worth at t=2?

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter5: Currency Derivatives

Section: Chapter Questions

Problem 28QA

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Concept explainers

Contingent Liabilities and Provisions

A contingent liability can be defined as a liability the occurrence of which is dependent upon the happening of an uncertain future event. It is generally recorded in the books only when the amount of liability can be reasonably estimated and the contingency is likely to occur shortly.

Question

Market observes the “exchange rates” as of today:($1/$0)=0.95 , ($2/$0)=0.87

1. What is the implied interest rate between time t=0 and t=2 ?

2. Now there is a project with three certain cashflows:
CF0=−$10MM
CF1=$5MM
CF2=$7MM
What is NPV0?

3. How much is CF1 worth at t=2?

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