You are the manager of an American pension fund and decide, on January 5, to buy 10,000 shares
of British Airways (BA) listed in London. You sell them on February 5. Here are the quotes that
you can use:
$$\begin{array} { l c c }
& \text { January } 5 & \text { February } 5 \
\hline \text { British Airways (E) } & 3.50 - 3.52 & 3.81 - 3.83 \
\$ / € & 1.5000 - 1.5040 & 1.4500 - 1.4540 \
\hline
\end{array}$$
You must pay the U.K. broker a commission of 0.2% of the transaction value (on the purchase and on the sale). There is a 0.5% U.K. securities transaction tax on purchase (but not on the sale); this tax cannot be recovered. Foreign exchange rates are the net of commissions and taxes.
a. What is your dollar rate of return on the operation?
b. Would the rate of return be the same for a British investor using the British pound as a reference currency?

Question

You are the manager of an American pension fund and decide, on January 5, to buy 10,000 shares
of British Airways (BA) listed in London. You sell them on February 5. Here are the quotes that
you can use:
 $$\begin{array} { l c c } 
& \text { January } 5 & \text { February } 5 \
\hline \text { British Airways (E) } & 3.50 - 3.52 & 3.81 - 3.83 \
\$ / € & 1.5000 - 1.5040 & 1.4500 - 1.4540 \
\hline
\end{array}$$
 You must pay the U.K. broker a commission of 0.2% of the transaction value (on the purchase and on the sale). There is a 0.5% U.K. securities transaction tax on purchase (but not on the sale); this tax cannot be recovered. Foreign exchange rates are the net of commissions and taxes.
a. What is your dollar rate of return on the operation?
b. Would the rate of return be the same for a British investor using the British pound as a reference currency?

Quizplus · Accepted Answer

The Answer of You are the manager of an American pension fund and decide, on January 5, to buy 10,000 shares
of British Airways (BA) listed in London. You sell them on February 5. Here are the quotes that
you can use:
 $$\begin{array} { l c c } 
& \text { January } 5 & \text { February } 5 \
\hline \text { British Airways (E) } & 3.50 - 3.52 & 3.81 - 3.83 \
\$ / € & 1.5000 - 1.5040 & 1.4500 - 1.4540 \
\hline
\end{array}$$
 You must pay the U.K. broker a commission of 0.2% of the transaction value (on the purchase and on the sale). There is a 0.5% U.K. securities transaction tax on purchase (but not on the sale); this tax cannot be recovered. Foreign exchange rates are the net of commissions and taxes.
a. What is your dollar rate of return on the operation?
b. Would the rate of return be the same for a British investor using the British pound as a reference currency?

You Are the Manager of an American Pension Fund and Decide