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PLEASE DON'T ANSWER UNLESS YOU KNOW FOR SURE AND CAN SHOW ALLLL WORK! An American Hedge Fund is considering a one-year investment in an Italian
PLEASE DON'T ANSWER UNLESS YOU KNOW FOR SURE AND CAN SHOW ALLLL WORK!
An American Hedge Fund is considering a one-year investment in an Italian government bond with a one-year maturity and a euro-denominated rate of return of i_pounds = 5%. The bond costs pounds 1,000 today and will return pounds 1, 050 at the end of one year without risk. The current exchange rate is pounds 1.00 = $1.50. U.S. dollar-denominated government bonds currently have a yield to maturity of 4%. Suppose that the European Central Bank is considering either tightening or loosening its monetary policy. It is widely believed that in one year there are only two possibilities: S_1($|pounds) = $1.80 per pounds or S_1($|pounds) = $1.40 per pounds Following revaluation, the exchange rate is expected to remain steady for at least another year Find the NPV in dollars for the American firm if they wait one year to buy the bond after the exchange rate rises to S_1($|pounds) = $1.80 per pounds. Assume that i_pounds doesn't change, Find the NPV in dollars for the American firm if they wait one year to undertake the project after the exchange rate falls to S_1($|pounds) = $1.40 per pounds. Assume that i_pounds doesn't change.) The hedge fund manager notices the "win big"/"lose big" payoffs associated with starting this project today. He asks you to value this bond using risk neutral valuationStep by Step Solution
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