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Multinational Finance and Exchange Rates

1) One year ago, a U.S. investor converted dollars to yen and purchased 100 shares of stock in a Japanese company at a price of 3,150 yen per share. The stocks total purchase cost was 315,000 yen. At the time of purchase, in the currency market 1 yen equaled $0.00952. Today, the stock is selling at a price of 3,465 yen per share, and in the currency market $1 equals 130 yen. The stock does not pay a dividend. If the investor were to sell the stock today and convert the proceeds back to dollars, what would be his realized return on his initial dollar investment from holding the stock?
a. +10.00%
b. -11.12%
c. +12.48%
d. +11.12%

2) A computer costs $1,100 in the United States. The same computer costs 1,265 euros in Italy. Assuming that purchasing power parity (PPP) strictly holds, what is the spot exchange rate between the dollar and the euro?
a. $3.75 = 1 euro
b. $1.00 = 2.50 euros
c. $1.00 = 0.869565 euro
d. $1.15 = 1 euro
e. $1.00 = 1.15 euros

3) A product sells for $750 in the United States. The exchange rate is such that $1 equals 1.0279 euros. If purchasing power parity (PPP) holds, what is the price of the product (in euros) in the EMU countries?
a. 123.750 euros
b. 454.550 euros
c. 750.000 euros
d. 770.925 euros
e. 925.393 euros

Solution Preview

1) One year ago, a U.S. investor converted dollars to yen and purchased 100 shares of stock in a Japanese company at a price of 3,150 yen per share. The stocks total purchase cost was 315,000 yen. At the time of purchase, in the currency market 1 yen equaled $0.00952. Today, the stock is selling at a price of 3,465 yen per share, and in the currency market $1 equals 130 yen. The stock does not pay a dividend. If the investor ...

Solution Summary

This solution is comprised of a detailed explanation and calculation to find the return on investment and exchange rate.

$2.19