Suppose a U.S. investor wishes to invest in a British firm currently selling for

Question

Suppose a U.S. investor wishes to invest in a British firm currently selling for £40 per share. The investor has $10,000 to invest, and the current exchange rate is $2/£. Suppose now the investor also sells forward £5,000 at a forward exchange rate of $2.10/E Calculate the dollar-denominated returns for each scenario. (Round your answers to 2 decimal places. Negative amounts should be indicated by a minus sign.) Price per Share (E) Exchange Rate Rate of Return (%) at Given Exchange Rate $2.00/E $1.80/E $2.20/E 35 £ 40 45

Explanation / Answer

Here first we need to find the number of shares

convert the dollar to pounds at exchange rate of 2 usd/pound

= 10000/2 = 5000 pounds

share price = 40 pounds per share

number of shrares = 5000/40 = 125 shares

Now we need to calculate total holdings at each price level(in $) and each exchange rate

eg : 35 * 1.8 * 125 = 7875

continue this in each cell at their respective price and exchange rate

Now we need to include the profit due to forward contract

that is 5000(2.10 -Exchange rate)

find the profit at each exchange rates

at 1.80 $/ pound

that is 5000(2.10 - 1.80) = 1500

similarily at 2 $ / pound = 500

at 2.20 $/pound = - 500 (loss)

now include these profits at each level of the exchange rates in the above table

fro example add 1500 at each share price level at 1.80 $ / pound rate section

now redraw the table

Now we need to find the rate of change.

For this consider the initial investment $ 10,000

example rate of change = (9375 - 10000)/10000 = - 6.25 %

repeat this step for each level

we can redraw the table as

price 1.8$/pound 2 $ / pound 2.2 $/pound 35 7875 8750 9625 40 9000 10000 11000 45 10125 11250 12375

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