Question

The current MXN/CHF spot exchange rate is 29.3. The MXN inflation rate is 3.7%, and the CHF inflation rate is 0.7%. If you are a Mexican firm with a MXN cost of capital for foreign projects of 10%, what is the PV (in MXN) of a payment of 5M CHF 2 years from today?

Answer 1

present value = future value / (1 + cost of capital)number of years

amount received in MXN after 2 years = amount received in CHF * exchange rate after 2 years

exchange rate after 2 years = current spot exchange rate * ((1 + MXN inflation rate) / (1 + CHF inflation rate))2

exchange rate after 2 years = 29.3 * ((1 + 3.7%) / (1 + 0.7%))2

exchange rate after 2 years = 31.0718

amount received in MXN after 2 years = amount received in CHF * exchange rate after 2 years

amount received in MXN after 2 years = 5,000,000 * 31.0718

amount received in MXN after 2 years = MXN 155,358,921

present value = future value / (1 + cost of capital)number of years

present value = 155,358,921 / (1 + 10%)2

present value = MXN 128,395,802

PV (in MXN) of a payment of 5M CHF 2 years from today =  MXN 128,395,802