Question

You are a U.S. investor who purchased British securities for 3,500 pounds 1 year ago when the British pound cost $1.35. No dividends were paid on the British securities in the past year. Your total return based on U.S. dollars was __________ if the value of the securities is now 4,200 pounds and the pound is worth $1.15.

A. -3.8% B. 2.2% C. 5.6% D. 15%

Answer 1

Solution:

As per the information given in the question we have :

One year Prior:

Purchase price of Securities in British Pounds = £ 3,500

1 British Pound = $ 1.35

Thus the purchase price in US Dollars = £ 3,500 * $ 1.35 = $ 4,725

Thus opening price in US Dollars = $ 4,725

One year later:

Value of Securities in British Pounds = £ 4,200

1 British Pound = $ 1.15

Thus the value of securities in US Dollars = £ 4,200 * $ 1.15 = $ 4,830

Thus closing price in US Dollars = $ 4,830

The formula for calculating the total return is

=( Closing price – Opening Price ) / Opening price

Applying the available information in the formula we have :

The Total return based on US Dollars is

= ( 4,830 – 4,725 ) / 4,725

= 105 / 4,725

= 0.022

= 2.22 %

Thus the Total return based on US Dollars is = 2.22 %

The solution is option B. 2.2 %