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Question - You are a U.S. investor trying to calculate the present value of a euro €7cmillion cash inflow that will occur one year in the future. The spot exchange rate is Upper S =$1.135/€, and the forward rate is Upper F =$1.157/€. You estimate that the appropriate dollar discount rate for this cash flow is 7 % and the appropriate euro discount rate is 5 %.

a. What is the present value of the euro €7 million cash inflow computed by first discounting the euro and then converting it into dollars?

b. What is the present value of the euro €7 million cash inflow computed by first converting the cash flow into dollars and then discounting

c. What can you conclude about whether these markets are internationally integrated, based on answers a and b?

Accounting Basics, Accounting

  • Category:- Accounting Basics
  • Reference No.:- M92501313
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