Concept explainers
Now suppose the investor in Problem
a. Recalculate the dollar-denominated returns for each scenario.
b. What happens to the standard deviation of the dollar-denominated return?
Compare it to both its old value and the standard deviation of the pound-denominated return.
(a)
To calculate:
The rates of return in dollar-denominated in different scenarios including a forward sale by the investor of
Introduction:
The dollar-denominated return is the return earned by the U.S. investor by investing a particular amount in foreign currency.
Answer to Problem 5PS
Below table highlights the values:
Per share price (£) | Dollar-Denominated Return (%) |
£ |
|
£ |
|
£ |
Explanation of Solution
Given:
Let's calculate the dollar-denominated return and for that, the following formula is used:
By using the above formula, Dollar-denominated return is computed as follows:
Per share price (£) | Dollar-Denominated Return (%) |
(b)
To calculate:
Ascertain the standard deviation of the dollar-denominated return.
Introduction:
Standard deviation is a measure to calculate the deviation from the mean which is also called as a measure of dispersion. It helps in analyzing the performance of the fund.
Answer to Problem 5PS
The standard deviation for the dollar-denominated return is
Explanation of Solution
Given:
The table showing outcomes:
Per share price (£) | Dollar-Denominated Return (%) |
£ |
|
£ |
|
£ |
For calculating the standard deviation, the following formula is to be used:
For computing standard deviation of dollar-denominated return, following calculation is needed:
Per share price (£) | Probability | Dollar-Denominated Return (%) | |
|
|
£ |
|
||||
£ |
|||||
£ |
|
||||
|
Variance computed as above is
Now, for standard deviation of dollar-denominated return at the rate of
Want to see more full solutions like this?
Chapter 19 Solutions
Essentials Of Investments
- Suppose a US investor purchases a UK equity. Let the expected pound return on the U.K. equity be 20%, and let its volatility (measured by standard deviation) be 30%. The volatility of the dollar/pound exchange rate is 10%. The risk-free rate in the U.S. (denoted rf) is 2%. Compute the volatility of the dollar return on the U.K. equity when the correlation (denoted as r) between the U.K. equity's return in pounds and changes in the dollar/pound exchange rate is 0.5.arrow_forwardSuppose a U.S. investor wishes to invest in a British firm currently selling for £60 per share. The investor has $6,000 to invest, and the current exchange rate is $2/£. Suppose now the investor also sells forward £3,000 at a forward exchange rate of $2.10/£. Calculate the dollar-denominated returns for each scenario. (Round your answers to 2 decimal places. Negative amounts should be indicated by a minus sign.)arrow_forwardSuppose a U.S. investor wishes to invest in a British firm currently selling for £40 per share. The investor has $20,000 to invest, and the current exchange rate is $2/£.Suppose now the investor also sells forward £10,000 at a forward exchange rate of $1.95/£. Required:a. Calculate the dollar-denominated returns for each scenario. (Round your percentage answers to 2 decimal places. Negative amounts should be indicated by a minus sign.)arrow_forward
- Suppose that the current EUR/GBP rate is 0.6668 and the one-year forward exchange rate is 0.6742. The one-year interest rate is 1.8% in euros and 3.6% in pounds. You can borrow at most €1,000,000 or the equivalent pound amount. Suppose you are a pound-based investor. Determine the profit/loss (in GBP, no cents) if you borrow locally and invest in Euros.arrow_forwardSuppose that the interest rate on a US dollar deposit is 3% and the interest rate on a Japanese yen deposit is 1%. Today’s exchange rate is $1/¥ and the expected rate one year in the future is $1.2/¥, so $100 today can be exchanges for ¥100. Which currency deposit yield a higher expected rate of return (which currency investors should be willing to hold)? Why?arrow_forwardPlease show complete steps and correct. Suppose a U.S. investor wishes to invest in a British firm currently selling for £40 per share. The investor has $12,000 to invest, and the current exchange rate is $2/£. Suppose now the investor also sells forward £6,000 at a forward exchange rate of $2.10/£. Calculate the dollar-denominated returns for each scenario. (Round your answers to 2 decimal places. Negative amounts should be indicated by a minus sign.).arrow_forward
- Suppose the risk free rate in pounds (£) is 5.71% and the risk free rate in US dollars ($) is 7.95%. The current £ to $ exchange rate is 1.48 (so £1 can be exchanged for $1.48 with the money exchanged right now). You and a broker want to agree an exchange rate now for a £ to $ conversion, but where the money will be exchanged in precisely 30 months time. What exchange rate (£ to $) should you and your broker use to ensure there is no arbitrage?arrow_forwardSuppose that 1 Danish krone could be purchased in the foreignexchange market today for $0.16. If the krone appreciated 4% tomorrow against thedollar, how many krones would a dollar buy tomorrow?arrow_forwardCurrently, you canexchange 1 euro for 1.25 dollars in the 180-dayforward market, and the risk-free rate on 180-daysecurities is 6% in the United States and 4% inFrance. Does interest rate parity hold? If not, whichsecurities offer the highest expected return?arrow_forward
- Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning