A French investor buys 100 shares of Goodyear Corp. for $3,000($30 per share). O
ID: 2662643 • Letter: A
Question
A French investor buys 100 shares of Goodyear Corp. for $3,000($30 per share). Over the course of the year, the stock goesup by 6 points. a. If there is a 10% gain in the value of the dollarversus the euro, what will be the total percentage return to theFrench investor? First dtermine the new dollar value of theinvestment and multiply this figure by 1.10. Divide thisanswer by $3,000 and get a percentage value, and then subtract 100percent to get the percentage return. b. Now assume that the stock increases by 8 points, butthat the dollar decreases by 14 percent versus the euro. Whatwill be the total percentage return to the French investor? Use .86 in place of 1.10 in this case. A French investor buys 100 shares of Goodyear Corp. for $3,000($30 per share). Over the course of the year, the stock goesup by 6 points. a. If there is a 10% gain in the value of the dollarversus the euro, what will be the total percentage return to theFrench investor? First dtermine the new dollar value of theinvestment and multiply this figure by 1.10. Divide thisanswer by $3,000 and get a percentage value, and then subtract 100percent to get the percentage return. b. Now assume that the stock increases by 8 points, butthat the dollar decreases by 14 percent versus the euro. Whatwill be the total percentage return to the French investor? Use .86 in place of 1.10 in this case.Explanation / Answer
You need to determine the return the French investor receives onhis dollar denominated investment in his local currency, theeuro.
We will start by making some assumptions that are designed tohelp us solve the problem. 1. There are no transactioncosts, and; 2. The dollar/euro exchange rate is $1.00 toe0.75 at the time the investment is made.
Therefore the investor converts e2,250 into $3,000 and buys his100 shares of Goodyear at $30/share.
Answer A
At the end of the year, Goodyear sells for $36/share (a 20%increase,) and the dollar gains 10% relative to the euro. Thedollar’s gain relative to the euro means that the same amountof dollars buys 10% more euros than at the beginning of theyear.
The value of the investment, in euros, is:
100 shares at $36/share = $3,600
$1.00 = e0.75 * 1.10 = e0.825
$3600 * 0.825 = e2,970
Return = (2970-2250)/2250 = 0.32 = 32%
Answer B
At the end of the year, Goodyear sells for $38/share (a 26.67%increase,) and the dollar loses 14% relative to the euro. Thedollar’s loss relative to the euro means that the same amountof dollars buys 14% fewer euros than at the beginning of theyear.
The value of the investment, in euros, is:
100 shares at $38/share = $3,800
$1.00 = e0.75 * 0.86 = e0.645
$3800 * 0.645 = e2,451
Return = (2451-2250)/2250 = 0.0893 = 8.93%
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