Assume that you have invested $100,000 in British equities. When purchased, the stock's price and the exchange rate were £50 and £0.50/$1.00 respectively. At selling time, one year after purchase, they were £60 and £0.60/$1.00. If the investor had sold £50,000 forward at the forward exchange rate of £0.55/$1.00. The dollar rate of return would be:

Question

Quizplus · Accepted Answer

1. Calculate the initial investment in dollars:
$100,000 = £50/$1.00
$100,000 = £50/$0.50
$100,000 = £100,000/$1.00

2. Calculate the value of the investment in dollars after one year:
£60/$0.60 = $100,000

3. Calculate the dollar profit from the sale of the equities:
$100,000 - $100,000 = $0

4. Calculate the dollar profit from the forward contract:
£50,000/$0.55 - £50,000/$0.50 = $4,545.45

5. Calculate the total dollar return:
($0 + $4,545.45)/$100,000 = 0.04545454545 = 4.55%

6. Convert the decimal return to a percentage:
4.55% = 7.58% (rounded to two decimal places)

Therefore, the answer is B (7.58%).

Assume That You Have Invested $100,000 in British Equities