Inputs:
Price per
Pound-
denominat
ed return
Dollar-
denomina
ted Return
% for Yr
End
Xchnge
Answers:
a. How
many
shares
can the
investor
purchase?
300
Problem 25-3
Suppose a U.S. investor wishes to invest in a British firm currently selling for £40 per share. The investor has $10,000 to i nvest, and the
current exchange rate is $2/£.
a.How many shares can the investor purchase?
Number of shares
b.Fill in the table below for rates of return after 1 year in each of the nine scenarios (three possible prices per share in pound
s times three
Exchange
share
Current
price in £
Initial
Investme
Standard
deviation
Problem 25-4
Suppose a U.S. investor wishes to invest in a British firm currently selling for £40 per share. The investor has
$10,000 to invest, and the current exchange rate is $2/£. Consider three possible prices per share at £35, £40 and
£45 after 1 year. Also, consider three possible exchange rates at $1.80/£, $2/£ and $2.20/£ after 1 year. Calculate
the standard deviation of both the pound– and dollar-denominated rates of return if each of the nine outcomes
Standard deviation of pound-denominated return
31 -0.06061
0.123712
Inputs:
Price per
share
Dollar-
denominate
d value at
given
Exchange
Rate of:
Price per
share
Total Dollar
proceeds at
given
exchange
rate:
$1.80 $2.00 $2.20 $1.80 $2.00 $2.20
16 $9,792.00 $10,880.00 ######### 16 $10,472.00 $10,200.00 $9,928.00
21 $12,852.00 $14,280.00 ######### 21 $13,532.00 $13,600.00 $13,668.00
26 $15,912.00 $17,680.00 ######### 26 $16,592.00 $17,000.00 $17,408.00
Profit on
fwd
Problem 25-5
Suppose a U.S. investor wishes to invest in a British firm currently selling for £40 per share. The investor has $10,000 to i nvest, and
the current exchange rate is $2/£.
Suppose now the investor also sells forward £5,000 at a forward exchange rate of $2.10/£.Calculate the dollar -denominated returns
for each scenario. (Round your answers to 2 decimal places. Negative amounts should be indicated by a minus sign. Omit the “%”
sign in your response.)
Price per Share Rate of return (%) at Given Exchange Rate
(£)Exchange Rate: $1.80/£ $2.00/£ $2.20/£
£35 %% %
exchange
rate
Current
Exchange
Rate
Price per
share
return % at
given
exchange
rate:
Current
share
price
Initial $
t
Inputs:
EAFE
Weight
ROE Index E1/E0
Mgr’s
Weight
Mgr’s
Return
Europe 0.5 0.18 10.48 0.17
Australia 0.4 0.15 10.45 0.18
Far East 0.1 0.23 1.2 0.07 0.18
EAFE Manager
Problem 25-6
Calculate the contribution to total performance from currency, country, and stock selection for the manager in the example below
. All exchange
rates are expressed as units of foreign currency that can be purchased with 1 U.S. dollar. (Round your answers to 2 decimal places. Input all
amounts as positive values. Do not round intermediate calculations. Omit the “%” sign in your response.)
EAFE Weight Return on Equity Index E1/E0 Manager’s Weight Manager’s Return
Europe 0.30 20% 0.9 0.35 18%
Inputs:
Current
Exchange
0.06
Answer:
Risk-free
Dollar-
Problem 25-7
If the current exchange rate is $1.75/£, the 1-year forward exchange rate is $1.85/£, and the interest rate on British
government bills is 8% per year.
Forward
Exchange
Interest