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Chapter 9

Q. 9.ST.6

Warden Co. is considering a project in Venezuela, which will be very profitable if the local currency (bolivar) appreciates against the dollar. If the bolivar depreciates, the project will result in losses. Warden Co. forecasts that the bolivar will appreciate. The bolivar’s value historically has been very volatile. As a manager of Warden Co., would you be comfortable with this project? Explain.

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Verified Solution

As the chapter suggests, forecasts of currencies are subject to a high degree of error. Thus, if a project’s success is very sensitive to the future value of the bolivar, there is much uncertainty. This project could easily backfire because the future value of the bolivar is very uncertain.