Question

The current MXN/CHF spot exchange rate is 22.4. The MXN inflation rate is 5.4%, and the CHF inflation rate is 0.3%. 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 7M CHF 9 years from today?

Answer 1

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

Amount received in MXN after 9 years = amount received in CHF * exchange rate after 9 years

exchange rate after 9 years = current spot exchange rate * ((1 + MXN inflation rate) / (1 + CHF inflation rate))9

exchange rate after 9 years = 22.4 * ((1 + 5.4%) / (1 + 0.3%))9

exchange rate after 9 years = MXN 35.003 / CHF

Amount received in MXN after 9 years = amount received in CHF * exchange rate after 9 years

Amount received in MXN after 9 years = 7,000,000 * 35.003

Amount received in MXN after 9 years = 245,020,916

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

present value = 245,020,916 / (1 + 10%)9

present value = MXN 103,912,787