Question

Emerald Energy is an oil exploration and production company that trades on the London stock market. Assume that when purchased by an international investor the stock's price and the exchange rate were £5 and £0.64/$1.00 respectively. At selling time, one year after the purchase date, they were £5.4 and £0.60/$1.00. Calculate the investor's annual percentage rate of return in terms of the U.S. dollars.

	A.	15.2 percent
	B.	1.28 percent
	C.	20.00 percent
	D.	28.00 percent

Answer 1

The answer is A. 15.2 percent

Purchase price of stock = 5 and the exchange rate is 1$ = 0.64

Now if 1$ = 0.64

then 1 = $ 1/0.64

So, value of purchase price in dollars is = 5* 1/0.64 = $ 7.81

Now after one year,

Sale price of stock = 5.4 and the exchange rate is 1$ = 0.60

Now if 1$ = 0.60

then 1 = $ 1/0.60

So, value of sale price in dollars is = 5.4 * 1/0.60 = $ 9

Annual rate of Return = (sale price - purchase price) / purchase price

  = (9-7.81) / 7.81

= 15.2 %