Question
You work for a U.S.-based firm that is considering a project in which it has an initial outlay of $2 million USD and expects to
You work for a U.S.-based firm that is considering a project in which it has an initial outlay of $2 million USD and expects to receive 5 million Canadian dollars (CAD) in one year. The current CAD spot rate is $0.78. Your firm decides to purchase put options on CAD today that expire in one year with an exercise price of $0.75 and a premium of $0.03 per unit to hedge the cash flow. Your firm decides that an appropriate required rate of return for this project is 20%. Determine the net present value in U.S. dollars of this project based on the forecast that the CAD is $0.70 at the end of one year.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started