Accounting for Country Risk of a Project Slidell Co. (a U.S. firm) considers a foreign project in which it expects to receive 10 million euros at the end of this year. It plans to hedge receivables of 10 million euros with a forward contract. Today, the spot rate of the euro is $1.20, the one-year forward rate of the euro is presently $1.24, and the expected spot rate of the euro in one year is $1.19. The initial outlay is $7 million. Slidell has a required return of 18 percent. There is a 20 percent chance that political problems will cause a reduction in foreign business, such that Slidell would receive only 4 million euros at the end of one year. Determine the expected value of the net present value of this project.

FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698

Solutions

Chapter 16, Problem 25QA
Textbook Problem

Accounting for Country Risk of a Project Slidell Co. (a U.S. firm) considers a foreign project in which it expects to receive 10 million euros at the end of this year. It plans to hedge receivables of 10 million euros with a forward contract. Today, the spot rate of the euro is $1.20, the one-year forward rate of the euro is presently $1.24, and the expected spot rate of the euro in one year is $1.19. The initial outlay is $7 million. Slidell has a required return of 18 percent. There is a 20 percent chance that political problems will cause a reduction in foreign business, such that Slidell would receive only 4 million euros at the end of one year. Determine the expected value of the net present value of this project.

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