Use the Information for the Question(s) Below

question 43

Multiple Choice

Use the information for the question(s) below.
You are a U.S. investor who is trying to calculate the present value (PV) of £5 million cash inflow that will occur one year in the future. The spot exchange rate is S = $1.8839/£ and the forward rate is F₁ = $1.8862/£. The appropriate dollar discount rate for this cash flow is 5.32% and the appropriate £ discount rate is 5.24%.
-You are a U.S. investor who is trying to calculate the present value (PV) of £15 million cash inflow that will occur one year from now. The spot exchange rate is $1.5742/£ and the forward rate is F₁ = $1.5682/£. The appropriate dollar discount rate for this cash flow is 1.05% and the appropriate £ discount rate is 1.45%. What is the present value of the dollar cash inflow computed by first converting the £ into dollars and then discounting the dollars?

• A) $23,275,505
• B) $23,186,792
• C) $23,278,575
• D) $23,367,640

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Definitions:

Index Fund

A type of mutual fund or exchange-traded fund (ETF) designed to replicate the performance of a specific market index.

Whole-Life Insurance

A type of permanent life insurance policy that offers a death benefit alongside a savings account component, covering the insured for their entire life.

Long-Term Bonds

Debt securities with maturities typically longer than 10 years, offering regular interest payments and repayment of principal at maturity.

Life Insurance Firms

Companies that provide financial compensation to beneficiaries upon the death of the insured person.