Question

QUESTION 3

Suppose that your colleague has approached you with an opportunity
to lend $25,000 to her laundry business in Accra. The business,
called Do it yourself launderette, plans to offer home services to
customers at area. Funds would be used to lease a delivery vehicle,
purchase supplies, and provide working capital. Terms of the
proposal are that you would receive $5,000 at the end of each year
in interest with the full $25,000 to be repaid at the end of a
ten-year period.

a) Assuming a 10% required rate of return, calculate the present
value of cash flows and the net present value of the proposed
investment.

EV

b) Based on this same interest rate assumption, calculate the
cumulative cash flow of the proposed investment for each period in
both nominal and present- value terms.

AP

c) If we are to use the monetary approach to exchange rate
determination, what will be the predicted effect on the exchange
rate of domestic currency if domestic real income increases?

AP

d) Using the same theory, what would be the effect on exchange rate
if domestic interest rate increases?

EV

e) You receive the following quotes on the Swiss franc against US $
for the spot, and 3 month forward rate:

Bid
Ask

Spot
SF
1.6075/$
SF 1.6085/$

3-month
14
22

Note that forward rate is expressed in points quote, where 1 point
is equal to SF 0.0001/$.

i. What is the outright bid and ask 3-month forward quote?

CR (3Marks)

ii. Using the mid-rate (i.e. the average of the bid & ask rate)
for spot and 3- month forward, compute the percentage forward
premium or discount on Swiss Franc.

AP 4(Marks)

Answer #1

This question has annuity as well as a single payment at the end of the period. Hence, the present value of cashflows would be calculated using PVAF table for the annuity and the pv of last payment will be calculated using pvf table.

PV of cash flows = $38433.58

NPV of cash flows = $13433.58

The calculation has been attached below

Currency
Spot quote
Euro (EUR/USD)
1.1278 - 1.1281
British pound (GBP/USD)
1.2845 - 1.2848
Swiss franc (USD/CHF)
1.0020 – 1.0022
Japanese yen (USD/JPY)
110.41 – 110.44
Dominican peso (USD/DOP)
50.540 – 50.600
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