Question
In: Finance
It is the year 2021 and Pork Barrels, Inc., is considering construction of a new barrel...
It is the year 2021 and Pork Barrels, Inc., is considering construction of a new barrel plant in Spain. The forecasted cash flows in millions of euros are as follows:
| C0 | C1 | C2 | C3 | C4 | C5 |
| –87 | +17 | +27 | +30 | +34 | +32 |
The spot exchange rate is $1.27 = €1. The interest rate in the United States is 11%, and the euro interest rate is 8%. You can assume that pork barrel production is effectively risk-free.
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b. What are the dollar cash flows from the project if the company hedges against exchange rate changes?
What are the dollar cash flows from the project if the company hedges against exchange rate changes? (Negative amounts should be indicated by minus sign. Enter your answers in millions. Do not round intermediate calculations. Round "Forward rate" to 3 decimal places and "Cash flow" to 2 decimal places.)
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Solutions
Expert Solution
Forward rate ( €/ $) = [ ( 1 + € Interest Rate) / ( 1 + $ Interest Rate) ] * Current Year Rate
Spot Rate ( Year 0) ( €/ $) Rate = 1.27
€ Interest Rate = 8% = 0.08
$ Interest Rate = 11% = 0.11
Forward rate ( €/ $) = ( 1.08 / 1.11 ) * Current Year Rate
Cash flow ($ million) = Cash Flow € / Forward rate ( €/ $)
Ans : cash flows ($ million) from the project if the company hedges against exchange rate are :
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Year
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Quantity of Fish
Price of Pork
Quantity of Pork
Price of Beef
Quantity of Beef
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