A investor invests 1,000 in risk-free British gilts, paying 9%per annum. At the time of making...

A investor invests 1,000 in risk-free British gilts, paying 9%per annum. At the time of making the investment the exchange rate was $2.5= £1.5At the end of the year the exchange rate is $1.85= £1. What return has the investor made? What is the broad point with it?

Solutions

Expert Solution

Step 1: Value of investment in pound

Value = $ 1000 / 2.50

= 400 Pounds

Step 2: Value of investment at the end of year (in pounds)

Value at the end of year = Investment * ( 1 + Interest rate )

= 400 * ( 1 + 0.09 )

= 436 pounds

Step 3: Value of investment at the end of year (in dollars)

Value = 436 pounds * 1.85

= $ 806.60

Step 4: Return earned

Return = [ 806.60 - 1000 ] / 1000

= -19.34% Answer

It signifies that exchange rate plays a crucial role while determing the return from overseas investment.

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

B) Assume that the risk-free interest rate is 9% per annum and that the dividend yield...

B) Assume that the risk-free interest rate is 9% per annum and that the dividend yield on a stock index varies throughout the year. In February, May, August, and November, dividends are paid at a rate of 5% per annum. In other months, dividends are paid at a rate of 2% per annum. On July 31(ex-dividend), the value of the index is 1,300. What should be the forward price for delivery on December 31(ex-dividend) of the same year? Annualized dividend...

Suppose that the risk-free zero curve is flat at 6% per annum with continuous compounding and...

Suppose that the risk-free zero curve is flat at 6% per annum with continuous compounding and that defaults can occur at times 0.25 years, 0.75 years, 1.25 years, and 1.75 years in a two-year plain vanilla credit default swap with semiannual payments. Suppose that the recovery rate is 20% and the unconditional probabilities of default (as seen at time zero) are 1% at times 0.25 years and 0.75 years, and 1.5% at times 1.25 years and1.75 years. What is the...

An index currently stands at 736 and has a volatility of 27% per annum. The risk-free...

An index currently stands at 736 and has a volatility of 27% per annum. The risk-free rate of interest is 5.25% per annum and the index provides a dividend yield of 3.65% per annum. Calculate the value of a five-month European put with an exercise price of 730.

"Suppose that the risk-free zero curve is flat at 7% per annum with continuous compounding and...

"Suppose that the risk-free zero curve is flat at 7% per annum with continuous compounding and that defaults can occur halfway through each year in a new five-year credit default swap. Suppose that the recovery rate is 30% and the hazard rate is 3%. a. Estimate the credit default swap spread. Assume payments are made annually. b. What is the value of the swap per dollar of notional principal to the protection buyer if the credit default swap spread is...

Suppose that the risk-free zero curve is flat at 3% per annum with continuous compounding and...

Suppose that the risk-free zero curve is flat at 3% per annum with continuous compounding and that defaults can occur at times 0.25, 0.75, 1.25, and 1.75 years in a two-year plain vanilla credit default swap with semiannual payments. Suppose, further, that the recovery rate is 25% and the unconditional probabilities of default (as seen at time zero) are 1.5% at times 0.25 years and 0.75 years, and 2.0% at times 1.25 years and 1.75 years. What is the credit default...

Suppose that the risk-free zero curve is flat at 6% per annum with continuous compounding and...

Suppose that the risk-free zero curve is flat at 6% per annum with continuous compounding and that defaults can occur at times 0.25 years, 0.75 years, 1.25 years, and 1.75 years in a two-year plain vanilla credit default swap with semi-annual payments. Suppose that the recovery rate is 20% and the unconditional probabilities of default (as seen at time zero) are 1% at times 0.25 years and 0.75 years, and 1.5% at times 1.25 years and 1.75 years. i) Estimate...

The ASX200 index is currently sitting at 6458. The risk-free interest rate is 2% per annum....

The ASX200 index is currently sitting at 6458. The risk-free interest rate is 2% per annum. Exactly three months remain before the Nov-19 SPI200 futures contract expires. The SPI200 is quoted at 6410. This futures price implies that the dividend yield on the ASX200 market index is?

A futures price is currently $25, its volatility (SD) is 30% per annum, and the risk-free...

A futures price is currently $25, its volatility (SD) is 30% per annum, and the risk-free interest rate is 10% per annum. What is the value of a nine-month European call on the futures with a strike price of $26 according to the BSM option pricing model? 1.75 2.67 3.67 2.008

A futures price is currently $25, its volatility (SD) is 30% per annum, and the risk-free...

Consider a bond (with par value = $1,000) paying a coupon rate of 9% per year...

Consider a bond (with par value = $1,000) paying a coupon rate of 9% per year semiannually when the market interest rate is only 5% per half-year. The bond has three years until maturity. a. Find the bond's price today and six months from now after the next coupon is paid. (Round your answers to 2 decimal places.) b. What is the total (six-month) rate of return on the bond? (Do not round intermediate calculations. Round your answer to the...

Subjects