Use the Following Information to Answer the Question(s) Below

question 20

Multiple Choice

Use the following information to answer the question(s) below.
Rearden Metal, a U.S. manufacturer, has made a purchase from d'Anconia Copper and is expecting a cash
outflow of 2 million ARS (Argentine Pesos) in six months. The currency spot rate is $0.2500/ARS and the
six-month forward rate is F6months = $0.2470/ARS. The appropriate annual discount rate for the
Argentine Peso is 6.5% and the annual discount rate for the U.S. dollar is 4%.
-The present value of Rearden Metal's cash outflow computed by first discounting the cash flow at the appropriate Argentine Peso rate and then converting to dollars is closest to:

• A)$469,500.
• B)$475,000.
• C)$481,000.
• D)$484,500.

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Definitions:

Risk-free Asset

A financial instrument that is considered to have no risk of financial loss, typically issued by a government.

Sharpe Measure

A method to evaluate the risk-adjusted return of an investment, comparing portfolio excess return to the standard deviation of the portfolio.

Excess Returns

The return on an investment above the return expected from risk-free investments or the market's benchmark.

Risk-free Asset

An investment that is assumed to have no risk of financial loss, often exemplified by government bonds.