Now if the price is
Share price | Cost Price | Profit per share (negative value means a loss) | Total profit on 1000 shares |
£ 31.00 | £ 33.00 | -£ 2.00 | -£2000 |
£ 36.00 | £ 33.00 | £ 3.00 | £3000 |
£ 41.00 | £ 33.00 | £ 8.00 | £8000 |
Now these need to be converted to $ for each exchange rate scenario:
Profit on shares | $ 1.80/£ | $ 2.00/£ | $ 2.20/£ |
-£ 2,000.00 | -200 x 1.8 = $ -3,600.00 | -2000 x 2 = $ -4,000.00 | -2000 x 2.2 = $ -4,400.00 |
£ 3,000.00 | 3000 x 1.8 = $ 5,400.00 | 3000 x 2 = $ 6,000.00 | 3000 x 2.2 = $ 6,600.00 |
£ 8,000.00 | 8000 x 1.8 = $ 14,400.00 | 8000 x 2 = $ 16,000.00 | 8000 x 2.2 = $ 17,600.00 |
Now coming to the forward contract. Here the contracted rate is $2.05 per £ so if the actual exchange rate is lower then the investor profits because he can exchange at a higher rate but if the rate in the market is higher, then he will lose because he will have to fulfill the contract at the contracted rate while had he not entered into the contract, he could get a higher rate in the market
Contracted amount | $ 1.80/£ | $ 2.00/£ | $ 2.20/£ |
£ 33,000.00 | 33000 x (2.05 -1.8) = $8,250.00 | 33000 x (2.05 -2) = $1,650.00 | 33000 x (2.05-2.20) = -$4,950.00 |
So total profit would be:
Share price | $ 1.80 | $ 2.00 | $ 2.20 |
£ 31.00 | $ -3,600.00 + 8250 = $4650 | $ -4,000.00+1650 = -$2350 | $ -4,400.00-4950=-$9350 |
£ 36.00 | $ 5,400.00+ 8250 = $13650 | $ 6,000.00+1650 = $7650 | $ 6,600.00-4950=$1650 |
£ 41.00 | $ 14,400.00+ 8250 = $22650 | $ 16,000.00+1650 = $17650 | $ 17,600.00-4950=$12650 |
Initial investment was $66000 so the return is :
4650/66000 x 100 = 7.05% | -2350/66000 x 100 = -3.56% | -9350/66000 x 100 = -14.17% |
13650/66000 x 100 = 20.68% | 7650/66000 x 100 = 11.59% | 1650/66000 x 100 = 2.50% |
22650/66000 x 100 = 34.32% | 17650/66000 x 100 = 26.74% | 12650/66000 x 100 =19.17% |
Problem 25-5 Suppose a US investor wishes to invest in a British firm currently selling for...
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