3.One year ago, an American investor bought 2000 shares of London Bridges at a p

Question

3.One year ago, an American investor bought 2000 shares of London Bridges at a price of £24 (or 24 UK pounds) per share when the exchange rate was $1.4/1£ (or $1.40 dollars = 1 pound). The investor also invested 4,000,000 Japanese Yen in a money market fund in Japan last year when the exchange rate was 110 Yen = $ 1 US.

(a) Using current exchange rates, what is today’s value of the investor’s portfolio in U.S. dollars if the UK investment decreased 10% (in local currency) and the Japan investment increased 1% (in local currency)?

(b) What is the overall rate of return on the portfolio over the last year?

Explanation / Answer

a)

VALUE OF INVESTMENT IN SHARE OF LONDON BRIDGES IN POUND= 24(0.90)*2000 = POUNDS 43,200

VALUE OF INVESTMENT IN JAPANESE MONEY MARKET FUND IN JAPANESE YEN = 400,000(1.01) =YEN 404,000

NOW ,

VALUE OF INVESTMENT IN SHARE OF LONDON BRIDGES IN DOLLARS = 43,200*1.4 = $60,480

VALUE OF INVESTMENT IN JAPANESE MONEY MARKET FUND IN DOLLARS = 404000/110 =$3,678

TOATAL VALUE OF THE PORTFOLIO TODAY = $ 64,158

b)

PREVIOUS VALUE OF THE PORTFOLIO in dollars = [(24*2000*1.4) + (400000/110)] = $70,836

overall rate po return = [($ 64,158-70,836)/70,836] * 100 = -9.43%

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