Question

Suppose a U.S. investor wishes to invest in a British firm currently selling for £25 per share. The investor has $8,500 to invest, and the current exchange rate is $4/£.

**a.** How many shares can the investor
purchase?

Number of shares

**b.** Fill in the table below for rates of return
after one year in each of the nine scenarios (three possible prices
per share in pounds times three possible exchange rates).
**(Leave no cells blank - be certain to enter "0" wherever
required. Negative values should be indicated by a minus sign. Do
not round intermediate calculations. Round your answers to 2
decimal places.)**

Price per | Pound-Denominated |
Dollar-Denominated Return (%) for Year-End Exchange Rate |
||||||||

Share (£) | Return (%) | $3.70/£ | $4.00/£ | $4.30/£ | ||||||

£ | 21.50 | % | % | % | % | |||||

£ | 25.00 | % | % | % | % | |||||

£ | 28.50 | % | % | % | % | |||||

Answer #1

a. shares purchased = (dollar amount to be invested/exchange rate)/price of shares in pounds =

(8500/4)/25=85

b.

Price per | Pound-Denominated | Dollar-Denominated Return (%) | ||||||||

for Year-End Exchange Rate | ||||||||||

Share (£) | Return (%) | 3.7 | 4 | 4.3 | ||||||

£ | 21.5 | -14 | % | -20.45 | % | -14 | % | -7.55 | % | |

£ | 25 | 0 | % | -7.5 | % | 0 | % | 7.5 | % | |

£ | 28.5 | 14 | % | 5.45 | % | 14 | % | 22.55 | % |

Where

pound return = ((pound selling price/pound purchase price-1)*100

dollar return = ((pound selling price*exchange rate end of year/pound purchase price*exchange rate beginning of the year-1)*100

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