(a) (3 marks)You want to invest in a riskless project in Sweden. The project has an initial cost of SKr2.1 million and is expected to produce cash inflows of SKr810,000 a year for 3 years. The project will be worthless after the first 3 years. The expected inflation rate in Sweden is 2 percent while it is 5 percent in the U.S. A risk-free security is paying 6 percent in the U.S. The current spot rate is $1 = SKr7.55. What is the net present value of this project in Swedish krona using the foreign currency approach? Assume that the international Fisher effect applies.

(b) (7 marks) The treasurer of a major US firm has $20 million to invest for six months. Effective

monthly rates are 0.41% in the U.S. and 0.52% in Great Britain. The spot exchange rate

is 0.6543 British pounds per $US and the six month forward rate is 0.644 British pounds

per $US.

Required:

(1) (7 marks) Ignoring transaction costs, in which country would the treasurer want to

invest the company's funds? Why?