Question

Suppose a U.S. Investor wishes to invest in a British firm currently selling for £30 per share. The investor has $14,400 to invest, and the current exchange rate is $2/£. Suppose now the investor also sells forward £7,200 at a forward exchange rate of $2.05/£. Calculate the dollar-denominated returns for each scenario. (Round your answers to 2 decimal places. Negative amounts should be indicated by a minus sign.) Price per Share ) Rate of Return (%) at Given Exchange Rate $1.30/E $2.00/ $2.2016 Exchange Rate: L 31 5.50%

Answer 1

Dollar return from stock investment Ret = ((14400/2)/30) *Stock Price * Exchange rate)/14400-1 Return from selling forwards Ret = (7200*2.05 - 7200*Exchange rate)/7200*2.05 Total return Price per share 1.80 2.00 2.20 -24.80% -27.56% -30.32% -9.80% -10.89% -11.98% 5.20% 5.77% 6.35%