The Home Currency Approach

To convert the project future cash flows into dollars, we will invoke the uncovered interest parity, or UIP, relation to come up with the projected exchange rates. Based on our earlier discussion, the expected exchange rate at time t, E(St), is:

3For example, the interest rates might be the short-term Eurodollar and euro deposit rates offered by large money center banks.

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

VIII. Topics in Corporate Finance

22. International Corporate Finance

© The McGraw-Hill Companies, 2002

CHAPTER 22 International Corporate Finance where R€ stands for the nominal risk-free rate in euroland. Because R€ is 7 percent, RUS is 5 percent, and the current exchange rate (S0) is € .5:

The projected exchange rates for the drill bit project are thus:

Year

Expected Exchange Rate

0 0

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