3. One year ago, an American investor bought 2000 shares of London Bridges at a

Question

3. One year ago, an American investor bought 2000 shares of London Bridges at a price of £24 (or 24 UK pounds) per share when the exchange rate was $1.4/1£ (or $1.40 dollars = 1 pound). The investor also invested 4,000,000 Japanese Yen in a money market fund in Japan last year when the exchange rate was 110 Yen = $ 1 US.

(a) Using current exchange rates, what is today’s value of the investor’s portfolio in U.S. dollars if the UK investment decreased 10% (in local currency) and the Japan investment increased 1% (in local currency)?

(b) What is the overall rate of return on the portfolio over the last year?

Explanation / Answer

shares boughts 2000.00 price 24.00 UK pounds Exchange rate 1.40 $ per pound investment 4000000.00 exchange rate 110.00 yen per $ a) today value Investment 48000.00 (2000*24) decreased by 10% 4800.00 value of investment 43200.00 UK pound Today exchange rate 1.40 value of investment in $ 60480.00 $ investment 4000000.00 increased by 1% 40000.00 value of investment 4040000.00 Yen exchange rate 110.00 value of investment in $ 36727.27 $ b) over all return of the porfolio return in UK investment -4800.00 pound Today exchange rate 1.40 US return -6720.00 $ return in Japanese investment 40000.00 exchange rate 110.00 US return 363.64 Net return of porfoilio -6356.36 intial investment in UK 48000.00 Today exchange rate 1.40 $ investment 67200.00 intial investment in Japan 4000000.00 exchange rate 110.00 $ investment 36363.64 Total investment in $ 103563.64 103563.64 return on porfoilio (6.14)% (-6356.36/103563.63)

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