1 A U.S. broker has posted the following quotes (in USD) for the share of an electronic firm: Buying rate =100 and selling rate =110. The exchange rates for one euro are: Buying (bid) $1.4550 and Selling (ask) = $1.4950 net. Assume you are an investor living in Europe and answer the following questions: a How much will you pay in dollars if you buy 1000 shares of that firm?…
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In Euros this would amount to 100,000/1.4950=66889.63. The ask rate is being used because the buyer of the share would first sell the Euros in the American market to get a 100,000 dollars to buy the shares. b) If you sell the shares you would receive 110,000 in USD. The buying rate would be used because the seller would have to buy the Euros from the market after selling in dollars. Therefore they would receive 110,000/1.4550 = 75601.37 Euros c) The cost of the broker when buying the shares= 100,000 *0.2%= 200 In Euros this cost would be 200/1.4950=133.77 Cost in Dollars = 100200 Cost in Euros =67023.409 Cost of the broker commission when selling the shares= 110,000 * 0.2%= 220 In Euros this cost would be= 220/1.4550=151,20, as the investor would buy from Dollars to pay the commission. The total proceeds would be 109,780 USD and 75752.58 Euro. 2 You are the manager of an American pension fund and decide, on January 5, to buy ten thousand shares of British Airways listed in London. You sell them on February 5. Here are the quotes that you can use: January 5 British Airways share price (?): Buying = 3.50 and selling = 3.52 Exchange rate (dollars per pound): Buying =1.5000 and selling = 1.5040 February 5 British Airways share price (?): Buying = 3.81 and selling 3.83 Exchange rate (dollars per pound): Buying =1.4500 and selling = 1.4540 You must pay the U.K. broker a commission of 0.2% of the transaction value (on the purchase and on the sale). (a) What is your sterling rate of return on the operation? (b) What is your dollar rate of return on the operation? Answers: Buying Cost in Pounds: 3.5 *10,000 = 35000 ? Buying Cost in USD: 35,000 *1.5= 52500 USD Commission on Purchase: 35000*0.2%=70? Commission on Purchase USD= 70 * 1.5= 105 Sale Proceeds in Pounds: 3.83*10,000= 38,300 ? Proceeds in USD: 38,300 * 1.4540 = 55688.2 Commissions on Sale : 38,300 * 0.02% = 76.8 ? Commission on Sale in USD: 76.8 *1.4540= 111.37 a) Sterling rate of return Total Investment : 35000+ 70= 35070? Total proceeds: 38300-76.8= 38376.8 Profit= 3306.8 Return= 9.429% b) Dollar Rate of return Investment in dollars: 52500+105=52605 Total Proceeds in USD: 55688-111.37= 55576.63 Profit in USD: 2971.63 Return: 5.648% 3 You are a U.S. investor and wish to buy ten thousand shares of Club Mediterranee (“Club Med”). You can buy them either in Paris or in London. You ask the brokers to quote you net prices (no commissions paid). There are no taxes on foreign shares listed in London. Here are the quotes: London (in ? per share): Buying at 56.75 and selling at 58.125 Paris (in € per share) Buying at 78 ? and selling at 78 ? The exchange rates are: Dollars per pound: buying = 1.9450 and selling = 1.9950 Dollars per euro: buying = 1.4850 and selling = 1.4855 What is your total dollar cost if you buy the Club Med shares at the cheaper place? Answers: If you buy the shares in London: 10,000 * 58.125 = 581250 ? If you buy the shares in Paris: 10,000 * 78. 75=787500 € Cost in Dollars in London Purchase= 581,250 * 1.9450=11,30,531 USD would be required. The buying price is used because investor would first sell dollars to get the pounds to buy the shares. Cost in USD of Paris Purchase: 787500*1.4850=1169437.5 USD The cheaper price to buy the shares would be 11, 30,531 USD. 4 Assume the following quotes: ii Mexican peso/USD 9.3850 –
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