Mia Caruso Enterprises, a U.S. manufacturer of children's toys, has made a sale in India and is expecting a 400-million-rupee cash inflow in one year. (The currency of India is the rupee.) The current spot rate is S=$0.022/rupee and the one-year forward rate is F1=$0.0210/rupee.
a. What is the present value of Mia Caruso's 400-million-rupee inflow computed by first discounting the cash flow at the appropriate India rupee discount rate of 10% and then converting the result into dollars?
b. What is the present value of the 400-million-rupee cash inflow computed by first converting the cash flow into dollars and then discounting it at the appropriate dollar discount rate of 5%?
c. What can you conclude about whether these markets are internationally integrated, based on your answers to (a) and (b)?
| a) | PV of 400 millions rupee | = | 400,000,000/1.1 | ||||||
| = | 363,636,364 | rupee | |||||||
| Amount in dollars | = | Amount inrupee*exchange rate | |||||||
| = | 363,636,364*0.022 | ||||||||
| = | 363,636,364*0.022 | ||||||||
| = | $8,000,000 | ||||||||
| b) | Amount in $ | = | 400,000,000*0.021 | ||||||
| = | 8400000 | ||||||||
| PV of amount in dollars | = | 8,400,000/1.05 | |||||||
| = | $8,000,000 | ||||||||
| c) | Since cashflow in both the alternatives are equal ,the markets are internationally integrated. | ||||||||
| Please upvote | |||||||||
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