Suppose a Turkish company investigates an investment opportunity in China. The project costs TL 10 million. The company expects to produce annual cash inflows of CNY 12 million for the next 3 years. The risk adjusted appropriate TL discount rate for the project (i^TL) is 12%. The current spot-exchange rate is CNY 3/TL. Yield curves are flat and the is selling at a 6-month forward premium of 95 basis points.

1- Assume the international parity conditions hold. Calculate V₀^TL|i^CNY by discounting at i^CNY and then converting into TL at the current spot rate.

2-

Suppose expected future spot rates are

E[S₁^CNY/TL]= CNY 2.8/TL

E[S₂^CNY/TL]= CNY 2.7/TL

E[S₃^CNY/TL]= CNY 2.7/TL

Calculate the value of the project in the first question from the parent's perspective.

3- What would you recommend the company in the first question should do? Invest? Hedge? Explain your answer...