Say that the current direct exchange rate is $1.5537/£. The cash inflow in pounds is £70,000 in two years and the discount rate is 7%
During this time, the anticipated annual inflation rate is 3% per year in the United States and 5% per year in the United Kingdom. What is the present value (in U.S. dollars) of the £100,000 after conversion from pounds to dollars if you are using current and forward exchange rates?
A) $70,000
B) $104,655.26
C) $91,409.96
D) $88,307.62
Answer: C
Explanation: C) First, we compute the forward exchange rate: 1.5537 × = $1.4951/£
Second, we convert all pounds into dollars using the forward exchange rate:
= £70,000 × $1.4951/£ = $104,655.26.
Third, we discount the dollar cash flow at the home discount rate:
= $91,409.96
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