Ben purchased 100 shares of stock from the Frankfurt (Germany) Stock Exchange at

Question

Ben purchased 100 shares of stock from the Frankfurt (Germany) Stock Exchange at a price of €52 per share when the exchange rate was €1 = $1.30. He sold the shares less than a year later at a price of €63 per share when the exchange rate was €1 = $1.39. While he was holding the shares, he received €2 per share in dividends.

a.    Find Ben’s total holding period return in U.S. dollars, rounded to the nearest percent. Show work.

b.    Show how the total return found in part (a) breaks down into its components. In other words, find the return earned on the stock in local currency; then find the return from changes in currency exchange rates.

Explanation / Answer

Ans;

a. Purchase of the 100 shares = €52*100 shares= €5,200

Holding value= €5,200* 1.30= $6,760.

Selling price= €63* 100shares=€6,300 valued at €6,300*1.39= $8757

Dividends received €2 * 100*1.39=$278.

Total Holding Period Return in U.S dollars= (Selling Price minus Purchase Price) + Dividends received.

= ($8757-$6,760)+$278=$2,275 or 34 per cent returns

b.In local currency of the stock, the return earned is (€6,300 -€5,200) = €1100

In current exchanges, the return is ($8,757-$6,760) = $1997

Then, the dividend received of €2 per share. The components make the total return amount.

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