# PPP and Cash Flows Boston Co. will receive 1 million euros in one year from selling exports. It did not hedge this future transaction. Boston believes that the future value of the euro will be determined by purchasing power parity (PPP). It expects that inflation in countries using the euro will be 12 percent next year, whereas inflation in the United States will be 7 percent next year. Today the spot rate of the euro is \$1.46, and the one-year forward rate is \$1.50. Estimate the amount of U.S. dollars that Boston will receive in one year when converting its euro receivables into U.S. dollars. Today, the spot rate of the Hong Kong dollar is pegged at \$0.13. Boston believes that the Hong Kong dollar will remain pegged to the dollar for the next year. If Boston Co. decides to convert its 1 million euros into Hong Kong dollars instead of U.S. dollars at the end of one year, estimate the amount of Hong Kong dollars that Boston will receive in one year when converting its euro receivables into Hong Kong dollars.

FindFind

### International Financial Management

14th Edition
Publisher: Cengage
ISBN: 9780357130698
FindFind

### International Financial Management

14th Edition
Publisher: Cengage
ISBN: 9780357130698

#### Solutions

Chapter 8, Problem 41QA
Textbook Problem

## PPP and Cash Flows Boston Co. will receive 1 million euros in one year from selling exports. It did not hedge this future transaction. Boston believes that the future value of the euro will be determined by purchasing power parity (PPP). It expects that inflation in countries using the euro will be 12 percent next year, whereas inflation in the United States will be 7 percent next year. Today the spot rate of the euro is \$1.46, and the one-year forward rate is \$1.50. Estimate the amount of U.S. dollars that Boston will receive in one year when converting its euro receivables into U.S. dollars. Today, the spot rate of the Hong Kong dollar is pegged at \$0.13. Boston believes that the Hong Kong dollar will remain pegged to the dollar for the next year. If Boston Co. decides to convert its 1 million euros into Hong Kong dollars instead of U.S. dollars at the end of one year, estimate the amount of Hong Kong dollars that Boston will receive in one year when converting its euro receivables into Hong Kong dollars.

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