• £/ spot exchange rate = 0.8 • £/C spot exchange rate = 0.4 • U.K. risk-free rate = 6% • U.K. expected inflation rate = 4% • Canadian risk-free rate = 9% • Canadian expected inflation rate = 7% • U.S. risk-free rate = 4% • U.S. expected inflation = 2% Consider the current U.S. dollar to C$ (/C) spot exchange rate. Suppose that after one year, the nominal spot /C exchange rate is 0.475. The likely impact on Slapshot’s valuation from the /C exchange rate change is the: A. C$ has depreciated in real terms, and the firm will be more competitive in the U.S. market, leading to a higher valuation. B. C$ has appreciated in real terms, and the firm will be more competitive in the U.S. market, leading to a higher valuation. C. C$ has appreciated in real terms, and the firm will be less competitive in the U.S. market, leading to a lower valuation. D. value of the C$ has not changed in real terms, so there should be no real impact on the firm’s valuation.
Part two: World market risk premium = 6% • Sensitivity of Slapshot to the world market = 1.2 • Sensitivity of Slapshot to changes in the £/C$ exchange rate = 1.4 • Holmes’ expectation for the depreciation of the C$ against the £ = 2% • The ratio of the price of the U.K. consumption basket to the Canadian consumption basket is 0.3. Suppose the C$ suddenly depreciates by 10 percent against the £. Given his estimated parameters, what would Holmes expect to happen to the local currency value of Slapshot in response to this sudden exchange rate change? A. Local currency value would fall by 10%. B. Local currency value would fall by 4%. C. Local currency value would increase by 10%. D. Local currency value would be unchanged.