Question: Salmony, a U.S.-based firm, is considering a new project in China. Its exit policy depends on selling its assets to a local firm for CNY20

Salmony, a U.S.-based firm, is considering a new project in China. Its exit policy depends on selling its assets to a local firm for CNY20 million (Chinese Yuan Renminbi) in three years. The firm analyzes the political situation in China and assesses a 15% probability of not realizing this value because of the chance of expropriation or war.

The current spot exchange rate is CNY6.23/$, but the yuan is expected to appreciate by 2% per year over the next three years to CNY5.8707/$. If Salmony’s USD-based WACC is 10%, what is the most Salmony would pay now (in USD) for insurance coverage of this country risk?

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