1.(Interest rate parity)

As an American investor, you are trying to calculate the present value of a 25 million cash flow that will occur one year in the future.You know that the spot exchange rate is S= $1.9397/ and one-year forward rate is F= $1.9581/ .You also know that the appropriate dollar cost of capital for this cash flow is 6.25% and that the appropriate pound cost of capital for this cash flow is 5.25%.

a)What is the present value of the 25 million cash flow from the standpoint of a British investor, and what is the dollar equivalent of this amount?

b)What is the present value of the 25 million cash flow from the standpoint of a U.S. investor who first converts the 25 million into dollars and then applies the dollar discount rate?

2.(Interest rate parity)

Sky Motors, based in Austin, TX, is considering opening a manufacturing plant in Mexico.Sky's weighted average cost of capital in the U.S. is 12%. The current risk-free rate is 2% in the U.S. and 8% in Mexico.If interest rate parity holds, what is the firm's peso WACC?

4.(Country Risk Premium) Suppose the interest on a foreign government bonds is 7.5%, and the current exchange rate is 28 foreign currencies per dollar.If the forward exchange rate is 28.5 foreign currencies per dollar, and the current US risk-free rate is 4.5%, what is the implied risk premium of the foreign government bond?