87 so the npv in swiss francs is npv sfr 25000000 sfr

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Unformatted text preview: o the dollar. False. The forward market would already reflect the projected deterioration of the euro relative to the dollar. Only if you feel that there might be additional, unanticipated weakening of the euro that isn’t reflected in forward rates today, will the forward hedge protect you against additional declines. 7. 8. c. 9. a. True. The market would only be correct on average, while you would be correct all the time. American exporters: their situation in general improves because a sale of the exported goods for a fixed number of euros will be worth more dollars. American importers: their situation in general worsens because the purchase of the imported goods for a fixed number of euros will cost more in dollars. American exporters: they would generally be better off if the British government’s intentions result in a strengthened pound. American importers: they would generally be worse off if the pound strengthens. American exporters: they would generally be much worse off, because an extreme case of fiscal expansion like this one will make American goods prohibitively expensive to buy, or else Brazilian sales, if fixed in reais, would become worth an unacceptably low number of dollars. American importers: they would generally be much better off, because Brazilian goods will become much cheaper to purchase in dollars. b. c. 10. IRP is the most likely to hold because it presents the easiest and least costly means to exploit any arbitrage opportunities. Relative PPP is least likely to hold since it depends on the absence of market imperfections and frictions in order to hold strictly. 11. It all depends on whether the forward market expects the same appreciation over the period and whether the expectation is accurate. Assuming that the expectation is correct and that other traders do not have the same information, there will be value to hedging the currency exposure. 12. One possible reason investment in the foreign subsidiary might be preferred is if this investment provides direct diversification that shareholders could not attain by investing on their own. Another reason could be if the political climate in the foreign country was more stable than in the home country. Increased political risk can also be a reason you might prefer the home subsidiary investment. Indonesia can serve as a great example of political risk. If it cannot be diversified away, investing in this type of foreign country will increase the systematic risk. As a result, it will raise the cost of the capital, and could actually decrease the NPV of the investment. 13. Yes, the firm should undertake the foreign investment. If, after taking into consideration all risks, a project in a foreign country has a positive NPV, the firm should undertake it. Note that in practice, the stated assumption (that the adjustment to the discount rate has taken into consideration all political and diversification issues) is...
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