Question

Suppose a u.s. investor wishes to invest in a british firm currently selling for £20 per share. the investor has $13,600 to invest, and the current exchange rate is $2 per £. suppose now the investor also sells forward £6,800 at a forward exchange rate of $1.90 per £. calculate the dollar-denominated returns for each scenario. note: round your answers to 2 decimal places. negative values should be indicated by a minus sign.

Answer 1

The dollar-denominated returns in each scenario are -$12,800 and -$680.

Step-by-step explanation:

To calculate the dollar-denominated returns in each scenario, we need to consider the initial investment and the forward contract.

In the first scenario, the investor has $13,600 to invest, and the exchange rate is $2 per £. Since the investor is buying £20 per share, the initial investment is 20 * £20 = £400. To convert this to dollars, we multiply by the exchange rate: £400 * $2 = $800. Therefore, the dollar-denominated return in this scenario is $800 - $13,600 = -$12,800.

In the second scenario, the investor sells forward £6,800 at a forward exchange rate of $1.90 per £. This means that the investor will receive £6,800 * $1.90 = $12,920 in the future. Therefore, the dollar-denominated return in this scenario is $12,920 - $13,600 = -$680.