The FX forecast indicates that the value of British Pound will fall vis-à-vis the US dollar over the next three months. You are considering investing for three months in a dually listed stock on the NYSE as well as the LSE. Since it is the same stock, the risk-return profile is identical except for the fact that it is listed for trade in different jurisdictions with different currencies. Assuming you are a British citizen, where should you purchase the stock – Britain or the United States? Provide suitable arguments for your decision

The FX forecast indicates that the value of British Pound will fall vis-à-vis the US dollar over the next three months. You are considering investing for three months in a dually listed stock on the NYSE as well as the LSE. Since it is the same stock, the risk-return profile is identical except for the fact that it is listed for trade in different jurisdictions with different currencies. Assuming you are a British citizen, where should you purchase the stock – Britain or the United States? Provide suitable arguments for your decision

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter8: Relationships Among Inflation, Interest Rates, And Exchange Rates

Section: Chapter Questions

Problem 14QA

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c) The FX forecast indicates that the value of British Pound will fall vis-à-vis the US dollar over the nextthree months. You are considering investing for three months in a dually listed stock on the NYSE aswell as the LSE. Since it is the same stock, the risk-return profile is identical except for the fact that itis listed for trade in different jurisdictions with different currencies. Assuming you are a British citizen,where should you purchase the stock – Britain or the United States? Provide suitable arguments foryour decision. (50 – 100 words)
Suppose that a French firm would like to have its stock available through an American Depository Receipt (ADR). If the firm’s stock is currently selling for €75 and that the exchange rate between the € and the $ is €1.0=$1.0592. What price should we expect for the ADR in US dollars? Suppose that over the next year the dollar reaches parity with the Euro, i.e., $1.00=€1.00 and that the price of the French firm’s stock rises to €100. What would expect the price of the ADR to be?
Suppose you are the treasurer of a U.S. multinational firm that wants to hedge the foreign exchange risk associated with your firm's sale of equipment to a Swiss firm worth CHF1,000,000. The receivable is due in six months. You want to ensure that Swiss francs are worth at least $0.70 when the francs are received so you want a strike price of $0.70. How many options contracts do you need to hedge this risk? Do you want a call or put on Swiss francs? When will you exercise the options? When will you let the options expire?
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Suppose a U.S. investor wishes to invest in a British firm currently selling for £60 per share. The investor has $6,000 to invest, and the current exchange rate is $2/£. Consider three possible prices per share at £54, £59, and £64 after 1 year. Also, consider three possible exchange rates at $1.60/£, $2/£, and $2.40/£ after 1 year. Calculate the standard deviation of both the pound- and dollar-denominated rates of return if each of the nine outcomes (three possible prices per share in pounds times three possible exchange rates) is equally likely. (Do not round intermediate calculations. Round your percentage answers to 2 decimal places.)
Suppose that investors are risk-neutral and the linear UIP equation holds. You are given the following information: UK interest rate: i = 0.07 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)