TA is thus undervalued by
Purchasing power parity holds that relative changes in price levels from inflation in countries will wring about the same relative change in the external value of the two currencies. So to calculate the exchange rate:
1 + U.S. inflation rate/1 + foreign inflation rate =
the future exchange rate/present exchange rate
1.04/1.12 = future exchange rate/144
If the exchange rate is expected to be PTA134/$, but is in fact PTA160/$, then it has devalued in actual terms.
The interest parity theorem states that there is a relationship between the spot-futures exchange rate in which there is no option for arbitrage. If the rate was above or below this rate, a no-risk profit opportunity would exist, and people taking advantage of it would move the rate toward the amount described by the interest parity theorem.
Since the question involves a six-month time period, we will simply divide the yearly rates in half for computational convenience.
Future rate=exchange rate((1+U.S. dep rate)/(1+for. rate))time
The unbiased forward rate hypothesis suggests that all available information, including deposit rates, are included in present exchange rates. The spot rate should then be the inflation-adjusted future rate.
The initial investment is 700 million zlotky, or $245 million. The formula is
risk-free rate + beta X (market rate - risk free rate)
.04 + .9(.1-.04) = .04 + (.9 X .06) = .094
The all-equity cost of capital is 9.4%
To do this analysis, we needed to use a centralized approach. This project was compared using the same criterion as any other project in the company. To do a decentralized analysis would have required the market rate of return in Poland.
Two assumptions are being made in this present value evaluation. First, the estimates made of future earnings were done assuming no change in exchange rates between now and then. Second, the discount rate us...