1. One year ago, an American investor bought 5000 shares of LBR in London at a p
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Question
1. One year ago, an American investor bought 5000 shares of LBR in London at a price of £24 (or 24 UK pounds) per share when the exchange rate was $1.2/1£ (or $1.20 dollars = 1 pound). The investor also invested 20,000,000 Japanese Yen in a money market fund in Japan last year when the exchange rate was 110 Yen = $ 1 US. Over the last year, the value of LBR decreased by 10% and the Japanese money market fund increased by 2%.
(a) Using current exchange rates, show the investor’s overall return on the LBR investment, and the return separated into the return on investment and return on exchange rate.
(b) Using current exchange rates, show the investor’s overall return on the Japanese Yen money market fund, and the return separated into the return on investment and return on exchange rate.
(c) What is the overall rate of return on the portfolio over the last year?
Explanation / Answer
Solution:
As current exchange rate is not given in the problem, let current exchane rate :
1 Pound = 1.34 dollar
1 US dollar = 113 Japaneese Yen
a) Investment in LBR = 5000*£24*1.20 = $144,000
As value fo share decresed by 10% therefore
Current market price of LBR = £24*90% = £21.60
Current value of investment in Us dollar = 5000*£21.60*1.34 = $144,720
Overall return on LBR investment = $144,720 - $144,000 = $720
Return on LBR investment = 5000*(£21.60 - £24)*1.20 = -$14,400
Return on LBR investment due to exchange rate = 5000 * £21.60 * (1.34 - 1.20) = $15,120
b) Investment in money market fund = 20,000,000 / 110 = $181,818
As value fo money market fund incresed by 10% therefore
Current value of market money fund in Japaneese yen = 20,000,000 * 102% = 20,400,000
Current value of money market fund in Us dollar = 20,400,000 / 113 = $180,531
Overall return on money market fund = $180,531 - $181,818 = $1,287
Return on money market fund investment = (20,400,000 - 20,000,000)/110 = $3,636
Return on money market fund investment due to exchange rate = [20400000/113] - [20400000/110] = -$4,923
c) Overall investment of portfolio = $144,000 + $181,818 = $325,818
Overall value of portfolio at the end of year = $144,720 + $180531 = $325,251
Return on portfolio = $325,251 - $325,818 = -$567
Rate of return on portfolio = -$567 / $325,818 = -0.17%
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