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
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
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.

  1. Estimate the amount of U.S. dollars that Boston will receive in one year when converting its euro receivables into U.S. dollars.
  2. 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.

This textbook solution is under construction.

Expert Solution

Want to see the full answer?

Check out a sample textbook solution.

Want to see this answer and more?

Experts are waiting 24/7 to provide step-by-step solutions in as fast as 30 minutes!*

*Response times vary by subject and question complexity. Median response time is 34 minutes and may be longer for new subjects.