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hi sir,
if the spot rate given in question is for 1 st of dec of 20×3 and the cash flow takes place in 31 dec of 20×4 then can we simply use spot rate adjusted for 1 year or do we have to adjust to 13 months? i would be very greatful if you could help me with this.I assume you mean adjust it using the purchasing power parity formula, in which case on the dates you have given you would have to adjust for 13 months.
However this has never ever been necessary in the exam (it has always been whole years) and so I am wondering if there is a typing mistake in whatever question you are looking at (or whether you have misread something).
Sir this was regarding Blipton hotel in bpp kit. The ques states that “it is now 1st of dec 2003…..current dollar/sterling ex rate is $1.4925/p….construction cost of hotel is P 6.2m and it will be built over 12 months to 31 dec 2004…all cash flow including the construction cost is assume to take place at end of the year concerned.”
The solution for the ques simply adjusts the inflation for 1 year ahead. shouldn’t it have been adjusted for 13 months? as you said it may be possible that i misread the question so sir please help me understand this.
also p = pound as there is no symbol for it in my laptop 🙂
We normally let time 0 be the date on which the proposed investment starts – not the date on which we are thinking about it.
If we decide to go ahead with the hotel, then it will start being built on 31 December X3 and so this would be time 0. The first outflow will be on 31 December X4 and so this will be time 1, and so on.
sir, but isn’t the quoted spot price for the day we are thinking about it, on 1st of december? shouldn’t it be adjusted to reflect the spot price for the day the cash flow takes place i.e. 13 months? what i understood from reading the ques was that the time between quoted spot rate and the time of cash flow was 13 months..
i am probably missing something obvious but i am still confused..Sorry – I realise I wasn’t answering the question you asked 🙁
You have a good point – strictly they should have used 13 months for forecasting the exchange rate.
However, I think it was just a slip up by the examiner – you would never be expected to do it for 13 months.
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