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Heyya John
(b)
1_they are asking for the NPV , why 20 usd and deposit of 2.64 is not taken in calculation2_why in interest rate parity the spot rate of 128 have used instead of 116 and in purchase power parity 116 is used , why that ???
3_didn’t understand the logic behind the 1.5 years calculation in interest rate parity.
I don’t understand what you are asking, because the exam question does not ask for an NPV anywhere in the question.
Are you looking at the actual exam question (and the examiners answer), or an amended version from somewhere?
Sorry John
it is part(c) not part(b)1)-In Npv they took only income not project cost of usd 20 m.
2)-why in interest rate parity the spot rate of 128 have used instead of 116 and in purchase power parity 116 is used , why that ???
3)-didn’t understand the logic behind the 1.5 years calculation in interest rate parity.
128 × (1.108/1.022) = 138.77
128 + [(138.77 – 128)/2] = 133.381. They have taken the project cost. That is the €21.84M that has been subtracted in arriving at the NPV (the workings for it are shown in part (b) of the answer.
2. It depends whether they are buying or selling MSHs
3. That is the 0.5 year calculation (not 1.5 year). It is taking half way between the spot figure (128) and the 1 year forward rate (138.77). ((128 + 138.77) / 2 = 133.4)
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