Question

uppose a U.S. investor wants to invest in a British firm currently selling for ₤50 per share. The investor has $7,000 to invest, and the current exchange rate is $1.40/₤. After 1 year, the exchange rate is unchanged and the share price is ₤60. What is the pound-denominated return? A. 20% B. 10% C. 9.3% D. 7.5% C.5.8%

Answer 1

Solution:

Calculation of amount of Pounds available for investment:

As per the information given in the question

Amount of dollars available with investor for Investment = $ 7,000

The Current exchange rate of the pound is 1 £ = $ 1.40

Thus the amount of Pounds available for investment is = Amount of dollars available with investor for Investment / Current exchange rate of the pound

= $ 7,000 / $ 1.40

= £ 5,000

Calculation of Number of shares purchased by the investor :

As per the information given in the question we have

Price per share of the British firm = £ 50

Amount of Pounds available for investment = £ 5,000

Thus the number of share purchased = Amount of Pounds available for investment / Price per share of the British firm

= £ 5,000 / £ 50

= 100 shares

Thus the number of shares purchased by the investor = 100 shares

Calculation of pound – denominated return :

As per the information given in the question we have

Purchase price per share = £ 50

Number of shares purchased = 100 shares

Thus total purchase cost of the shares = Purchase price per share * Number of shares purchased

= £ 50 * 100 = £ 5,000

Thus the Initial Purchase price of the shares = £ 5,000

Further we have

Price per share at the end of year 1 = £ 60

Number of shares purchased = 100 shares

Thus Price of the shares at the end of Year 1 = Price per share at the end of year 1 * Number of shares purchased

= £ 60 * 100 = £ 6,000

Price of the shares at the end of Year 1 = £ 6,000

The pound denominated return is calculated using the following formula:

= ( Price of the shares at the end of Year 1 - Initial Purchase price of the shares ) / Initial Purchase price of the shares

Applying the available information in the formula we have

= ( £ 6,000 - £ 5,000 ) / £ 5,000

= £ 1,000 / £ 5,000

= 0.20

= 20 %

Thus the pound denominated return is = 20 %

The solution is Option A. 20 %