45. An American purchased US$1,000 worth of British Pounds Sterling from a forei

Question

45. An American purchased US$1,000 worth of British Pounds Sterling from a foreign exchange (forex) broker to buy British Auto (ticker: BA) stock denominated in British pounds. On the purchase date the U.S. dollars and British pounds exchange rate was Eo- $1.20/E1. The American took her newly purchased British pounds to an American stock broker that had a British office and bought 20 shares of BA stock for E41.66/share. BA pays no cash dividends. One year later, the American sold her long position in BA for E40/share. The exchange rate was E $1.1/E1 when BA was sold. Ignoring taxes and commissions, what was the American investor's holding period return in U.S. dollars from her investment in BA? A, 4.74%; B, 5.82%; C.6.95%; D, 8.10%; E, 8.90%

Explanation / Answer

Step 1 : convert $ 1000 into pound getting = 1000÷1.16= Pound 833.33

Step 2. Purchased stock worth Pound 833.20

I.e., 20× 41.66= 833.20

Step 3. Sold shares @ 40 getting 40× 20= pound 800

Step 4. Convert into $ getting 800×1.1= $880

Holding period return in $ terms= 880-1000÷1000×100=-12%

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