Question

Suppose a U.S. investor wishes to invest in a British firm currently selling for £40 per share. The investor has $12,000 to invest, and the current exchange rate is $2/£.

a. How many shares can the investor purchase? (Round your answer to the nearest whole number.)

	Number of shares

b. Fill in the table below for dollar-denominated rates of return after one year in each of the nine scenarios (three possible share prices denominated in pounds times three possible exchange rates). (Round your answers to 2 decimal places. Leave no cells blank - be certain to enter "0" wherever required. Negative amounts should be indicated by a minus sign.)

	Price per Share (£) Pound-Denominated Return (%) Dollar-Denominated Return (%) for Year-End Exchange Rate $1.60/£ $2.00/£ $2.40/£ £36 % % % % £41 % % % % £46 % % % %

Answer 1

a. Conversion into Euro = Total Investment/Exchange rate

=12,000/2 = 6,000

Total Number of Share Purchased = 6,000/40

=150 Shares

b.

working Note

1.

Pound-Denominated Return (%) = End of the Year Price - Beginning price/Beginning Price x 100

For Price 36 =(36 - 40)/40 x 100 = -10%

For Price 41 =(41 - 40)/40 x 100 = 3%

For Price 46 =(46 - 40)/40 x 100 = 15%

2.

Price per Share (£)	Pound-Denominated Return (%)	Dollar-Denominated Return (%) for Year-End Exchange Rate
		$1.60/£	$2.00/£	$2.40/£
£36	-10%	-28%	-10%	8%
£41	3%	-18%	-3%	23%
£46	15%	-8%	15%	38%

Dollar denomiated Return (%)

for $1.60/£ (£36) = (36 x 1.60) - (40 x 2)/ (40 x 2)

=-28%

for $1.60/£ (£41) = (41 x 1.60) - (40 x 2)/(40 x 2)

=-18%

for $1.60/£ (£46) = (46 x 1.60) - (40 x 2)/(40 x 2)

-8%

for $2.00/£ (£36) = (36 x 2.00) - (40 x 2)/ (40 x 2)

=-10%

for $2.00/£ (£41) = (41 x 2.00) - (40 x 2)/(40 x 2)

=-3%

for $2.00/£ (£46) = (46 x 2) - (40 x 2)/(40 x 2)

15%

for $2.40/£ (£36) = (36 x 2.40) - (40 x 2)/ (40 x 2)

=8%

for $2.40/£ (£41) = (41 x 2.40) - (40 x 2)/(40 x 2)

=23%

for $2.40/£ (£46) = (46 x 2.40) - (40 x 2)/(40 x 2)

38%