EBK INVESTMENTS
11th Edition
ISBN: 9781259357480
Author: Bodie
Publisher: MCGRAW HILL BOOK COMPANY
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Question
Chapter 25, Problem 5PS
Summary Introduction
(a)
To calculate:
The rates of return in dollar-denominated in different scenarios including a forward sale by the investor of
Introduction:
The dollar-denominated return is the return earned by the U.S. investor by investing a particular amount in foreign currency.
Summary Introduction
(b)
To calculate:
Ascertain the standard deviation of the dollar-denominated return.
Introduction:
Standard deviation is a measure to calculate the deviation from the mean which is also called as a measure of dispersion. It helps in analyzing the performance of the fund.
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Suppose you start with buying a stock in £ (equivalent to $100) 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 the sale, the exchange rate is £1 = $1.6. What is your total percentage
return? What percentage of your return is due to the exchange rate?
Total return = 12.50%; Exchange rate return = 6.67%.
Total return = 20%; Exchange rate return = 7.50%.
Total return = 20%; Exchange rate return = 0.0%.
Total return = 12.50%; Exchange rate return = 7.50%.
Total return = 0.0%; Exchange rate return = 7.50%.
Total return = 20%; Exchange rate return = 6.67%.
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Suppose that investors are risk-neutral and the linear UIP equation holds.
You are given the following information:
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US interest rate: i*
= 0.02
Expected future spot rate e^e = 8.
What is the current spot rate, e?
(State your answer as a number to 2 decimal places. Exchange rates are Pounds per Dollar, in natural logs)
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