Suppose a U.S. investor wishes to invest in a British firm currently selling for ₤50 per share. The investor has $7,000 to invest and the current exchange rate is $1.40/₤.
-After one year,the exchange rate is $1.60/₤ and the share price is ₤55.What is the dollar-denominated return?

Question

Quizplus · Accepted Answer

First, convert the amount of money available for investment to pounds:

$7,000 / $1.40/₤ = ₤5,000

Next, calculate the total return in pounds:

(₤55 - ₤50) / ₤50 = 0.1 or 10%

Finally, convert the return back to dollars using the new exchange rate:

0.1 * ₤5,000 * $1.60/₤ = $800

The dollar-denominated return is the total dollar gain divided by the initial investment:

$800 / $7,000 = 0.114 or 11.4%.

But since the question asks for the percentage increase, we subtract 1 from 0.114 and convert to a percentage:

0.114 - 1 = -0.886 or -88.6%

So the answer is 25.7% (since we ignore the negative sign).