Question $6$

$\frac{0}{20}$ points

A US company is evaluating a project in the UK which requires an investment of $690$ million pounds today $($Oct $16)$ and produces an expected cash flow of $700$ million pounds in one year $($Sep $17).$ The yearly discount rate for the US company $($in dollars$)$ is equal to $6\%.$ The current exchange rate is $1\mathrm{.}2173.$ You can use the data on dollar$-$pound futures in the table below:

$\backslash$table$[[$British Pound $($CME$)-62,500$; $ per $],[,$Open,High,Low,Settle,Chg$,$LIFETIME,Open Int$],[,$High,$(\backslash$Delta grad$),$Low$],[$Dec $16,1\mathrm{.}2199,1\mathrm{.}2337,1\mathrm{.}2194,1\mathrm{.}2305,+\mathrm{.}0100,1\mathrm{.}5000,,1\mathrm{.}2034,251,328],[$Mar $17,1\mathrm{.}2221,1\mathrm{.}2357,1\mathrm{.}2218,1\mathrm{.}2327,+\mathrm{.}0101,1\mathrm{.}4735,,1\mathrm{.}2121,3,044],[$Jun $17,1\mathrm{.}2336,1\mathrm{.}2376,1\mathrm{.}2325,1\mathrm{.}2352,+\mathrm{.}0101,1\mathrm{.}5003,,1\mathrm{.}2159,428],[$Sep $17,1\mathrm{.}2240,1\mathrm{.}2278,1\mathrm{.}2232,1\mathrm{.}2373,+\mathrm{.}0100,1\mathrm{.}4554,,1\mathrm{.}2152,158]]$

Est vol $139,085,$ vol n$.$a$.$ n$.$a: open int, $254,982,$ n$.$a$.$

Sources: SIXFinancial intormation; WSJ Market Data Group; historical data prior to $6/15/11$: Thomson Reuters, WSJ Market Data Group

How can the US company eliminate the exchange rate risk associated with the transaction $($use Pound future contract$)?$

Compute the NPV of this project in millions of dollars, assuming that the business risk of the project is the same as of the US business.

Answer for blank # $1$: Future Cash Flow in USD$=700,000,000$GBP $1\mathrm{.}2173US\frac{D}{G}BP=851,110,000$USD