Investments, tenth edition

Dollar-Denominated Return 

for Year-End Exchange Rate

Price per Share (£)

Pound-Denominated 

Return (%)

$1.80/£

$2/£

$2.20/£

£35

£40

£45

    c.   When is the dollar-denominated return equal to the pound-denominated return?     

   4.  If each of the nine outcomes in Problem 3 is equally likely, find the standard deviation of both the 

pound- and dollar-denominated rates of return.  

   5.  Now suppose the investor in Problem 3 also sells forward £5,000 at a forward exchange rate of 

$2.10/£. 

     a.   Recalculate the dollar-denominated returns for each scenario.  

    b.   What happens to the standard deviation of the dollar-denominated return? Compare it to both 

its old value and the standard deviation of the pound-denominated return.    

   6.  Calculate the contribution to total performance from currency, country, and stock selection for the 

manager in the example below. All exchange rates are expressed as units of foreign currency that 

can be purchased with 1 U.S. dollar.  

EAFE Weight

Return on 

Equity Index

E

1

/E

0

Manager’s 

Weight

Manager’s 

Return

Europe

0.30

20%

0.9

0.35

18%

Australasia

0.10

15

1.0

0.15

20

Far East

0.60

25

1.1

0.50

20

   7.  If the current exchange rate is $1.75/£, the 1-year forward exchange rate is $1.85/£, and the inter-

est 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?  

Basic

Intermediate