In: Accounting
A US MNC tries to sell off its assets in France and retain US dollars back. Now the company is facing three scenarios, and the euro value of its French assets and the exchange rate under each scenario is indicated in the table below.
State |
Probability |
Euro Value |
Exchange Rate |
Dollar Value |
Scenario 1 |
1/3 |
€900 |
$1.35/€ |
|
Scenario 2 |
1/3 |
€1,000 |
$1.50/€ |
|
Scenario 3 |
1/3 |
€1,100 |
$1.65/€ |
|
We sell €_________ forward at the 1-year forward rate of ________
A. Dollar value table
dollar value is derived by multiplying euro amount *dollar exchange rate
A | B | C | D=B*C | A*D | |
Scenario | Probability | Euro value | Exchange rate | Dollar value | Probabilistic value |
1 | 0.333333 | 900 | $1.35 | 1,215 | 405 |
2 | 0.333333 | 1000 | $1.50 | 1,500 | 500 |
3 | 0.333333 | 1100 | $1.65 | 1,815 | 605 |
Total | 1,510 |
a. $ net cash flow when the French assets is worth €980, and the exchange rate is $1.35/€ will be 980*1.35=1323 $b)
b. $ net cash flow when the French assets is worth €1,000, and the exchange rate is $1.50/€ will be 1000*1.5=1500$
c. $ net cash flow when the French assets is worth €1,070, and the exchange rate is $1.65/€=1070*1.65$=1766$