QUESTION 12

10,000 10,000 10,000 S₀^/ = 3.00/

1,000 i = 5%

time 0 1 2 3 i = 7%

1.(4 points) Assume the international parity conditions hold . What is the expected future spot rate [E(S₃^/ )] at time t = 3?

2.(4 points) Assume the international parity conditions hold . What is net present value in pounds, V?

3. (10 points) Assume the international parity conditions do not hold. Expected future spot rates are: E(S₁^/) = 3.060/, E(S₂^/) = 3.100/, and E(S₃^/) = 3.220/. Calculate the net present value of the project V|i by converting euros to pounds at the expected future spot rates and discounting in pounds. Assume S₀^/ = 3/ and i = 7%.