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I posted this in the wrong forum before so please pardon me.
Can you suggest the best approach to solve questions which have both Foreign NPV and APV elements?
If you’ve explained this in your lectures can you kindly redirect me?
Can you also tell me which lecture covered Probability of default? I can’t seem to find it in the notes?
There are basically 3 steps:
1 Determine the cash flows in the foreign currency in exactly the same way as any investment appraisal.
2 Convert the net cash flows into the home currency (which will probably require forecasting the future exchange rates using the PPP formula – covered in the chapter on forecasting exchange rates).
3 Having converted to the home currency it then becomes a standard APV problem.
With regard to ‘probability of default’, I assume you mean value at risk, which is the first topic in the list of free lectures.
Thank you for the reply on APV.
By default risk I meant the risk the equity holders will default on debt, BPP says it is 1 – N(D2).
The VaR does not concern this but I must compliment your lecture on VaR.
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