8. Consider an investment in a foreign stock (e.g. a stock trading on the London

Question

8. Consider an investment in a foreign stock (e.g. a stock trading on the London stock exchange) by a U.S. national (domestic investor). The domestic investor takes U.S. Dollars, converts them to the foreign currency (e.g. British Pound) via the exchange rate (price of foreign currency in U.S. dollars) and then purchases the foreign stock using the foreign currency. When the stock is sold, the proceeds in the foreign currency must then be converted back to the domestic currency. To be more precise. consider the information in the table below: a. Compute the simple rate of return, Re, from the prices of foreign currency. b. Compute the simple rate of return, Ruk, from the UK stock prices. c. Compute the simple rate of return, Rus, from the prices in US dollars. d. What is the relationship between Rus, Ruk and Re?

Explanation / Answer

Answer:a Simple rate of return = (1.30-1.50)/1.30

=-0.1538%

Answer:b [(45-40)/40]*100=12.5%

Answer:c [(58.5-60)/58.5]*100=-2.564%

Answer:d these are interrelated each other.

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