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Problem 25-5 Suppose a U.S. investor wishes to invest in a British firm currently selling for £100 per share. The investor has $24,000 to invest, and the current exchange rate is $2/£. Suppose now the investor also sells forward £12,000 at a forward exchange rate of $1.90/£. Calculate the dollar-denominated returns for each scenario. (Round your answers to 2 decimal places. Negative amounts should be indicated by a minus sign.)

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ayokenny2001

Answer:

1. First scenario. The dollar denominator return is $200

2. Second scenario.

Explanation:

Scenario 1.

The total value of investment when converted to pounds is ;

$24,000 ÷ £2 = £12,000 since the current exchange rate is $2 per £.

Since the price is £100 per share

Therefore;

The value of the shares that can be purchased is ;

£12,000 ÷ £100 = 120 shares.

To calculate the dollar denominator returns,

Multiply the exchange rate with present price

Therefore;

$2/£× £100 = $200.

Scenario 2.

Let the value of investment be x.

Since the current exchange rate is $1.90 per £

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