Quantitative Problems

 1. A German sports car is selling for 70,000 euros. What is the dollar price in the U.S. for the German

car if the exchange rate is 0.90 euros per dollar?

Solution: 

70,000 Euros × ($1/0.90 euros) = $77,777.77 Chapter 13 The Foreign Exchange Market  77

  2. An investor in England purchased a 91-day T-bill for $987.65. At that time, the exchange rate was

$1.75 per pound. At maturity, the exchange rate was $1.83 per pound. What was the investor’s

holding period return in pounds?

Solution: The bond cost $987.65/$1.75 = £564.37.

At maturity, the $1,000 is worth $1,000/$1.83 = £546.45.

The holding period return is (546.45 − 564.37)/564.37 = −0.0317.

 3. An investor in Canada purchased 100 shares of IBM on January 1st at $93.00/share. IBM paid an

annual dividend of $0.72 on December 31st. The stock was sold that day as well for $100.25. The

exchange rate is $0.68/Canadian dollar on January 1st and $0.71/Canadian dollar on December 31st.

What is the investor’s total return in Canadian dollars?

Solution: The price of each share is $93.00/$0.68 = 136.76 Canadian dollars.