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