Question

Calculate the euro-based return an Italian investor would have realized by investing €10,000 into a $50 American stock. One year after investment, the stock pays a $1 dividend, and sells for $54 the exchange has changed from €0.625 per dollar to €0.6875 per dollar, although he sold $17,600 forward at the forward rate of €0.65 per dollar.

Answer 1

Solution :

Italian investor wants to invest €10,000 in American stocks so he needs to convert this into USD

Current exchange rate = €0.625 , so  €10,000 = €10,000 / €0.625 USD = $16,000

Current price of share = $50 so he can purchase $16,000/$50 = 320 Shares

Now after One year , Stock price = $54 , so Investment will become $54*320 = $17,280

He will also receive dividend of $1 per share so assuming that investor will receive $1*320 =$320 as dividend

So total value of investment = $17,280 + $320 = $17,600

He will convert this to Euro at current exchange rate of €0.6875 per dollar

So Value in Euro = $17,600 * €0.6875 = € 12,100

As the investor has already sold $17,600 forward at forward rate of €0.65 per dollar.

So he will now have to pay $17,600 and he will pay that from the investment so Euro required for this future contract = $17600 * 0.65 = € 11,440

Net profit = Total invested amount after one year in Euro - forward sell in Euro = € 12,100 - € 11,440 = € 660

Return = Profit/ initial investment = 660/10,000 = 6.6%