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 $1.50/₤ and the share price is ₤45.How much of your dollar-denominated return is due to the currency change?

Question

Quizplus · Accepted Answer

To calculate the return due to the currency change, we need to calculate the initial investment in dollars and the final investment in dollars.

Initial investment: 
$7,000 / $1.4/₤ = ₤5,000

Final investment: 
₤45 x $1.5/₤ = $67.5
$67.5 / ₤1.5/₤ = ₤45

The return due to the currency change is: 
($67.5 - $7,000) / $7,000 = 0.9643 or 9.64%

Therefore, the answer is B) 6.43%.