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?
A) $5,984.35
B) $5,954.36
C) $5,924.46
D) $5,936.54
Answer: B
Explanation: B) First, we compute the forward exchange rate:
12 pesos per dollar × = 13.879672 pesos per dollar.
Second, we convert all pesos into dollars using the forward exchange rate:
= $7,204.78.
Third, we discount the dollar cash flow at the home discount rate:
= $5,954.36.
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