You are a Canadian investor who is trying to calculate the present value of a 5 million EUR cash inflow that will occur one year in the future. The spot exchange rate is S 5 1.25 CAD/EUR and the forward rate is F1 = 1.215 CAD/EUR. You estimate that the appropriate CAD discount rate for this cash flow is 4% and the appropriate EUR discount rate is 7%.
a. What is the present value of the 5 million EUR cash inflow computed by first discounting the EUR and then converting it into CAD?
b. What is the present value of the 5 million EUR cash inflow computed by first converting the cash flow into CAD and then discounting?
c. What can you conclude about whether these markets are internationally integrated, based on your answers to parts (a) and (b)?
