Question

The current MXN/CHF spot exchange rate is 26. The MXN inflation rate is 6.8%, and the CHF inflation rate is 0.7%. If you are a Mexican firm with a MXN cost of capital for foreign projects of 9%, what is the PV (in MXN) of a payment of 2M CHF 4 years from today?

Answer 1

Current spot exchange rate = 26

Exchange rate after 4 years =

where is the MXN inflation rate and

is the CHF inflation rate

The predicted CHF/MXN exchange rate after 4 years = 26*(1.068/1.007)^4 = 32.89

MXN equivalent of 2 million (after 4 years) = 2,000,000*32.89 = 65,780,000 MXN

PV of 65,780,000 MXN using the cost of capital for foreign project = 65,780,000/(1.09^4) = 46,600,210 MXN