The spot exchange rate for the Thai bhat is 33.135 bhat to the dollar. The Host Hotel Company will be able to repatriate profits from its luxury resort hotel in Phuket in 5 years. It has estimated the 5 year forward rate at 38 bhat to the dollar
The risk-free rate in the U.S. is 4% and Host uses an 11 % risk premium for investments of this type. If the expected accumulated profits after 5 years are 100 million bhat, what is their present value in U.S. dollars.
Answer: Present value in bhats is 100,000,000/(1 + .04 + .11)5 = 49,717,674. Dividing the PV in bhats by the forward price of 38 bhats to the dollar, we obtain $1,308,360.
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