Question: You have developed an algorithm based on Artificial Intelligence that trades foreign exchange automatically using statistical arbitrage. You expect that the algorithm will give you

You have developed an algorithm based on Artificial Intelligence that trades foreign exchange automatically using statistical arbitrage. You expect that the algorithm will give you a small but steady profit of $900 dollar every year forever. However, it will cost you $10 000 today to hire a developer who can set up the program. You want to know whether you should go through with this idea. The interest rate is 3% per year and you would pay the developer today. It will take some time for the developer to build the program and so you expect to get your first positive cashflow from the algorithm in two years time.

a. What is the NPV of this investment? (answer with two decimals)

b. The developer suggest an improvement based on reinforcement learning so that the amount earned by the algorithm would increase with 1% every year. What is the new NPV? (answer with two decimals)

c. You consider whether you should learn to code so that you can build the program that supports the trading algorithm yourself. You would study part-time for the coming 5 years, but would then be able to build the algorithm for free (including the improvement suggested by the developer). Your first profit from the algorithm is thus expected in 6 years. What is the new NPV? (answer with two decimals)

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