Jimmy Ellington has just sold 120 shares of Coke for €75 per share. He purchased

Question

Jimmy Ellington has just sold 120 shares of Coke for €75 per share. He purchased the Coke shares for €80 per share a year ago. The exchange rate is $1.20/€ now and was $1.10/€ a year ago.

a) compute the profit from this investment in dollar terms.

b)What is the "rate of return" on this invesment in dollar terms?

c)Now suppose that Jimmy sold €9,600 (which is the principal amount of investment in euro terms) forward at the forward rate of $1.22/€, in order to hedge against the exchange rate uncertainty. What is the rate of return on Jimmy's Coke stock investment in dollar terms?

Explanation / Answer

Exchange Rate Amount(Euro) Amount($) Purchase Cost 1.1 80 88 Sales Price 1.2 75 90 a) Profit (in $ Terms Amount) 2 120 $240 b) Rate of return % ($ terms) 2.27 c) Purchase Cost 1.1 9600 10560 Realisation from sales 1.22 9000 10980 Profit ($Amount) 420 Retun in $ (%) 3.977

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