Question

Suppose a U.S. investor wishes to invest in a British firm currently selling for £30 per share. The investor has $6,000 to invest, and the current exchange rate is $2/£.

Suppose now the investor also sells forward £3,000 at a forward exchange rate of $1.95/£.

Calculate the dollar-denominated returns for each scenario. (Round your answers to 2 decimal places. Negative amounts should be indicated by a minus sign.)

	Price per Share (£) Rate of Return (%) at Given Exchange Rate Exchange Rate: $1.80/£ $2.00/£ $2.20/£ £26 % % % £31 % % % £36 % % %

Answer 1

	Rate of return
Price per share	Exchange rate
	$                  1.80	$                     2.00	$                2.20
£                     26.00	-14.50%	-15.83%	-17.17%
£                     31.00	0.50%	0.83%	1.17%
£                     36.00	15.50%	17.50%	19.50%
WORKINGS:
Number of shares purchased = 6000/(2*30) =			100
Price per share of GBP 26:
Sale value of 100 shares = 100*26 =			£        2,600.00
Exchange rate of $1.80:
Amount realized at forward rate = 2600*1.95 =			$        5,070.00
Profit on balance GBP = (3000-2600)*(1.95-1.80) =			$              60.00
Total profit			$        5,130.00
Return = 5130/6000-1 =			-14.50%
Exchange rate of $2.00:
Amount realized at forward rate = 2600*1.95 =			$        5,070.00
Loss on balance GBP = (3000-2600)*(1.95-2.00) =			$            -20.00
Total profit			$        5,050.00
Return = 5050/6000-1 =			-15.83%
Exchange rate of $2.20:
Amount realized at forward rate = 2600*1.95 =			$        5,070.00
Loss on balance GBP = (3000-2600)*(1.95-2.20) =			$          -100.00
Total profit			$        4,970.00
Return = 4970/6000-1 =			-17.17%
Price per share of GBP 31:
Sale value of 100 shares = 100*31 =			£        3,100.00
Exchange rate of $1.80:
Amount realized at forward rate = 3000*1.95 =			$        5,850.00
Profit on balance GBP = (3100-3000)*(1.80) =			$            180.00
Total profit			$        6,030.00
Return = 6030/6000-1 =			0.50%
Exchange rate of $2.00:
Amount realized at forward rate = 3000*1.95 =			$        5,850.00
Profit on balance GBP = (3100-3000)*(2.00) =			$            200.00
Total profit			$        6,050.00
Return = 6050/6000-1 =			0.83%
Exchange rate of $2.20:
Amount realized at forward rate = 3000*1.95 =			$        5,850.00
Profit on balance GBP = (3100-3000)*(2.20) =			$            220.00
Total profit			$        6,070.00
Return = 6070/6000-1 =			1.17%
Price per share of GBP 36:
Sale value of 100 shares = 100*36 =			£        3,600.00
Exchange rate of $1.80:
Amount realized at forward rate = 3000*1.95 =			$        5,850.00
Profit on balance GBP = (3600-3000)*(1.80) =			$        1,080.00
Total profit			$        6,930.00
Return = 6930/6000-1 =			15.50%
Exchange rate of $2.00:
Amount realized at forward rate = 3000*1.95 =			$        5,850.00
Profit on balance GBP = (3600-3000)*(2.00) =			$        1,200.00
Total profit			$        7,050.00
Return = 7050/6000-1 =			17.50%
Exchange rate of $2.20:
Amount realized at forward rate = 3000*1.95 =			$        5,850.00
Profit on balance GBP = (3600-3000)*(2.20) =			$        1,320.00
Total profit			$        7,170.00
Return = 7170/6000-1 =			19.50%