class notes

Matthew's Sporting Goods has entered a contract that contains foreign exchange risk because they are buying product from an EU currency country and selling the product in the U.S. The problem states that in each quarter of a year, Matthew's purchase will cost the firm 100,000 Euros and that they can sell the product for $125,000. If the exchange rate is $1.10 for 1 Euro, then: Profit =$125,000(100,0001.10)=$15,000 a. If Matthew's continues this contract over 2 years, then each quarter they will make $15,000. b. If the exchange rate between Euros and Dollars is such that the in U.S. Dollar exchange rate starts at $1.15 and rises by $0.05 each quarter for eight consecutive quarters, then: Q1:Profit=$125,000(100,0001.15)=$10,000Q2:Profit=$125,000(100,0001.20)=$5,000Q3:Profit=$125,000(100,0001.25)=$0Q4:Profit=$125,000(100,0001.30)=$5,000Q5:Profit=$10,000Q6:Profit=$15,000Q7:Profit=$20,000Q8:Profit=$25,000 This question is a variant of the Spont Hotel example that was presented in ciass, in the class notes, and in the Real Option chapter. The change to considet is this: suppose that the value of the hotel is one of two values: $3.7 millon if the oty is successful in obtaining the franchise (and not 58 million as in the original problem) of $3.5 t the cify is not evocessful in obtaining the franchise (and not 32mill on as in the original picoblem). Al other aspocts of the problem are the same as originaly presentod, such as the costs per year. Assume that the probabily of obeaining the franchise is 50% incorporating these new hote values from above, and the real option, what is the new NPr of the project? million Place your answer in milions of dollars uning at least theee decimal places. For example, the answer of nine hundred seventy five thousand would be entered as 0975 and not as 975000. Return to the Sport Hotel exarrile in the course notes, the lesson, and in Chapter 9 . Suppose that everything stays the same as was presented in the original problem, except one thing - the value of the hotol, should the city be uwarded the franchise, is not $8 millien but instead is $5.90 million. Using this new value of the hotel, What is the NPV of the project assuming that the probabily of the cify being awarded the franchise is 50% ? milion Place your ansaver in milions of dolars using theee decinal places For examile, the answer of rine hundred and seventy five thousand woild be enternd as 0.875 Matthew's Sporting Goods has entered a contract that contains foreign exchange risk because they are buying product from an EU currency country and selling the product in the U.S. The problem states that in each quarter of a year, Matthew's purchase will cost the firm 100,000 Euros and that they can sell the product for $125,000. If the exchange rate is $1.10 for 1 Euro, then: Profit =$125,000(100,0001.10)=$15,000 a. If Matthew's continues this contract over 2 years, then each quarter they will make $15,000. b. If the exchange rate between Euros and Dollars is such that the in U.S. Dollar exchange rate starts at $1.15 and rises by $0.05 each quarter for eight consecutive quarters, then: Q1:Profit=$125,000(100,0001.15)=$10,000Q2:Profit=$125,000(100,0001.20)=$5,000Q3:Profit=$125,000(100,0001.25)=$0Q4:Profit=$125,000(100,0001.30)=$5,000Q5:Profit=$10,000Q6:Profit=$15,000Q7:Profit=$20,000Q8:Profit=$25,000 This question is a variant of the Spont Hotel example that was presented in ciass, in the class notes, and in the Real Option chapter. The change to considet is this: suppose that the value of the hotel is one of two values: $3.7 millon if the oty is successful in obtaining the franchise (and not 58 million as in the original problem) of $3.5 t the cify is not evocessful in obtaining the franchise (and not 32mill on as in the original picoblem). Al other aspocts of the problem are the same as originaly presentod, such as the costs per year. Assume that the probabily of obeaining the franchise is 50% incorporating these new hote values from above, and the real option, what is the new NPr of the project? million Place your answer in milions of dollars uning at least theee decimal places. For example, the answer of nine hundred seventy five thousand would be entered as 0975 and not as 975000. Return to the Sport Hotel exarrile in the course notes, the lesson, and in Chapter 9 . Suppose that everything stays the same as was presented in the original problem, except one thing - the value of the hotol, should the city be uwarded the franchise, is not $8 millien but instead is $5.90 million. Using this new value of the hotel, What is the NPV of the project assuming that the probabily of the cify being awarded the franchise is 50% ? milion Place your ansaver in milions of dolars using theee decinal places For examile, the answer of rine hundred and seventy five thousand woild be enternd as 0.875