Question

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​)?

Answer 1

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.
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