Question

Calculate the euro-based return an Italian investor would have realized by investing €10,000 into a £50 British stock. One year after investment, the stock pays a £1 dividend, and sells for £54 the exchange rate has changed from €1.25 per pound to €1.30 per pound, although he sold £8,800 forward at the forward rate of €1.28 per pound.

Return= 28%

Continue from problem #2. Assuming the same investor sold £10,000 forward at the forward rate of €1.28 per pound (Instead of £8,800). Calculate the return of this Italian investor.

Return=_____%

Answer 1

1. Initial investment by Italian Company is Eur 10000
2. Bought stock at 50 Pound each at current exchange rate of 1.25.
3. No. of stock purchased is = (10000/1.25)*50 = 8000 Pounds
4. No of shares = 8000/50 = 160 Shares

5. Price of Stock is now 54 Pounds.
6. So profit is 54*160= 8640 Pounds.
7. Got a dividend of 1 Pound per share i.e. 1*160= 160 Pounds.
8. So Total Profit on investment over a period of one year is = 8640 +160 = 8800 Pounds.

9. Italian Company booked 8800 Pounds at 1.28 Exchange Rate and there was a change in exchange rate to 1.30
10. So to calculate the return
((Total Profit*Exchange Rate)-(Difference in Exchange Rate)-(Amount of Initial Investment))/Amount of Initial Investment

1. Total Profit is 8800 Pounds
2. Exchange Rate is 1.28
3. Difference in Exchange rate (10000*(1.28-1.30)) note:- Currently he sold 10000 Pounds forward.
4. Amount of Initial Investment - 10000 Euro

=((8800*1.28)+(10000*(1.28-1.30))-10000)*100/10000
Result = 10.64% is the return