Chapter 6: Q9I (page 663)
If the current exchange rate is \(1.75/£, the one-year forward exchange rate is \)1.85/£, and the interest rate on British government bills is 8% per year, what risk-free dollar denominated return can be locked in by investing in the British bills?
14.17%
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Suppose a U.S. investor wishes to invest in a British firm currently selling for £40 per share.
The investor has \(10,000 to invest, and the current exchange rate is \)2/£
a. How many shares can the investor purchase?
b. Fill in the table below for rates of return after one year in each of the nine scenarios (three possible prices per share in pounds times three possible exchange rates).
| Price per share (￡) | Price denominated return (%) | Dollar-Denominated Return (%) for Year-End Exchange Rate | ||
1.80/￡ | 2.00/￡ | 2.20/￡ | ||
￡35 | ||||
￡40 | ||||
￡45 | ||||
c. When is the dollar-denominated return equal to the pound-denominated return?
For Questions 1–4, answer true or false. Explain your answer.
Question: For a passive investor, the minimum-variance portfolio of country indexes is optimal.
The investment policy statement of an institution must be concerned with all of the followingexcept:
a. Its obligations to its clients.
b. The level of the market.
c. Legal regulations.
d. Taxation.
If each of the nine outcomes in Problem 5 is equally likely, find the standard deviation of both the pound- and dollar-denominated rates of return.
Question: Suppose a U.S. investor wishes to invest in a British firm currently selling for £40 per share.
The investor has \(10,000 to invest, and the current exchange rate is \)2/£
a. How many shares can the investor purchase?
b. Fill in the table below for rates of return after one year in each of the nine scenarios (three possible prices per share in pounds times three possible exchange rates).
| Price per share (￡) | Price denominated return (%) | Dollar-Denominated Return (%) for Year-End Exchange Rate | ||
1.80/￡ | 2.00/￡ | 2.20/￡ | ||
￡35 | ||||
￡40 | ||||
￡45 | ||||
c. When is the dollar-denominated return equal to the pound-denominated return?
You are being interviewed for a job as a portfolio manager at an investment counseling partnership. As part of the interview, you are asked to demonstrate your ability to develop investment portfolio policy statements for the clients listed below:
a. A pension fund that is described as a mature defined benefit plan, with the workforce having an average age of 54, no unfunded pension liabilities, and wage cost increases forecast at 5% annually.
b. A university endowment fund that is described as conservative, with investment returns being utilized along with gifts and donations received to meet current expenses, the spending rate is 5% per year, and inflation in costs is expected at 3% annually.
c. A life insurance company that is described as specializing in annuities; policy premium rates are based on a minimum annual accumulation rate of 7% in the first year of the policy and a 4% minimum annual accumulation rate in the next five years.
List and discuss separately for each client described above the objectives and constraints that will determine the portfolio policy you would recommend for that client.
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