Question

Suppose you start with $100 and buy stock in £ when the exchange rate is £1=$1.5. One year later, the stock price changes to £75, and you sell it. At the time of sale, exchange rate is £1=$1.6. What is your total return? Multiple Choice 125% Suppose you start with $100 and buy stock in £ when the exchange rate is £1=$1.5. One year later, the stock price changes to £75, and you sell it. At the time of sale, exchange rate is £1=$1.6. What is your return (just) due to the exchange rate? Multiple Choice

Answer 1

To calculate your total return, we need to consider two factors: the change in the stock price and the change in the exchange rate.First, let's calculate the change in the stock price.

You initially bought the stock at £1 = $1.5, and one year later, the stock price is £75. Since the exchange rate remains the same, we can calculate the change in the stock price in dollars as:Next, let's calculate the change in the exchange rate. Initially, the exchange rate was £1 $1.5, and at the time of sale, it changed to £1 = $1.6. To calculate the change in the exchange rate, we subtract the initial exchange rate from the final exchange rate:

The total return is calculated by considering both the change in the stock price and the change in the exchange rate. The change in the stock price is calculated by multiplying the initial stock price in pounds by the initial exchange rate. The change in the exchange rate is calculated by subtracting the initial exchange rate from the final exchange rate. The total return is then calculated by adding the change in the stock price to the initial investment. In this case, the total return is $112.5.

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