You work for an Israeli company that is considering an investment in China’s Sichuan province. The investment yields expected after-tax Chinese new yuan cash flows (in millions) as follows: 

Expected inflation is 6 percent in shekels and 3 percent in yuan. Required returns for this risk-class are i^ILS = 15 percent in Israeli shekels and i^CNY = 11.745 percent in yuan. The spot exchange rate is S₀ ^ILS∕CNY = ILS 0.5526∕CNY. Assume the international parity conditions hold.

a. Calculate V₀^ILS|_i^CNY by discounting at the appropriate risk-adjusted yuan rate i^CNY and then converting into shekels at the current spot rate.

b. Calculate V₀^ILS|i^ILS by converting yuan into shekels at expected future spot rates and then discounting at the appropriate rate in shekels.  

Transcribed Image Text:

+CNY200m +CNY500m +CNY300m -CNY600m