Question

Suppose a U.S. investor wishes to invest in a British firm currently selling for £40 per share. The investor has $24,000 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.)

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/££32%%%%£37%%%%£42%%%%

Answer 1

a) Current exchange rate

= 1 pound = 2 $

? = 24000 $

=12000 pounds

Thus investor can buy shares worth 12000 pounds

Total no. of shares that can be purchased = Total amount of investment/Price per share

=12000/40

=300 shares

b) Let us first find Pound denominated return

Return = Selling price per share - buying price per share/Buying price per share

For selling price = 32 pounds

Return = 32-40/40

=-8/40

=-0.2

i.e -20%

For selling price = 37 pounds

Return = 37-40/40

=-3/40

=-0.075

i.e -7.5%

For selling price = 42 pounds

Return = 42-40/40

=2/40

=0.05

i.e 5%

Now lets calculate Dollar denominated return(%)

Here buying price was based on exchange rate of 1 pound = 2$

Thus share worth 40 pound would cost = 40 x 2 = 80$

If exchange rate is 1 pound = 1.6 $

For selling price = 32 pounds

Selling price in $ = 32 x 1.6 = 51.20$

Thus

Return = 51.20-80/80

=-28.80/80

=-0.36

i.e -36%

For selling price = 37 pounds

Selling price in $ = 37 x 1.6 = 59.20$

Thus

Return = 59.20-80/80

=-20.80/80

=-0.26

i.e -26%

For selling price = 42 pounds

Selling price in $ = 42 x 1.6 = 67.20$

Thus

Return = 67.20-80/80

=-12.80/80

=-0.16

i.e -16%

If exchange rate is 1 pound = 2 $

For selling price = 32 pounds

Selling price in $ = 32 x 2 = 64$

Thus

Return = 64-80/80

=-16/80

=-0.20

i.e -20%

For selling price = 37 pounds

Selling price in $ = 37 x 2 = 74$

Thus

Return = 74-80/80

=-6/80

=-0.08

i.e -8%

For selling price = 42 pounds

Selling price in $ = 42 x 2 = 84$

Thus

Return = 84-80/80

=4/80

=0.05

i.e 5%

If exchange rate is 1 pound = 2.4 $

For selling price = 32 pounds

Selling price in $ = 32 x 2.4 = 76.80$

Thus

Return = 76.80-80/80

=-3.20/80

=-0.04

i.e -4%

For selling price = 37 pounds

Selling price in $ = 37 x 2.4 = 88.80$

Thus

Return = 88.80-80/80

=8.80/80

=0.11

i.e 11%

For selling price = 42 pounds

Selling price in $ = 42 x 2.4 = 100.80$

Thus

Return = 100.80-80/80

=20.80/80

=0.26

i.e 26%