International exchange rates impact corporate finance in a number of ways. [Chap 21]

A. The cost of a pound today is $1.30. So, the cost of one US dollar is .77 today, which is S₀. Interest rates on 10 year gilts in London are 1.07% and 10 year Treasury bonds are 2.22% here in the US. Use interest rate parity formula to predict the price of the dollar in one year. The formula for interest rate parity is: F₁/S₀ = (1+ R_FC)/(1 + R_US).

B. Briefly explain how you would calculate the NPV of a proposed project in Mexico, including how you would deal with the problem of Pesos and US dollars in your analysis.