c) 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. (50 – 100 words)

c) 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. (50 – 100 words)

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

See similar textbooks

Similar questions

Suppose that the spot price of a Canadian dollar is U.S. $0.89 and that the exchange rate has a volatility of 7% per year. Risk-free interest rates are 6% in the U.S. and 4% in Canada. Calculate the price of a 6-month European call option to buy one Canadian dollar for U.S. $0.89. Express your answer in terms of the cumulative normal distribution function, N(x), as in the answers to question 16 in part 1. What is the price of a 6-month option to buy U.S. $0.89 for one Canadian dollar? Please show all your work! Thank you SO much
(c) You are in the United States. The date is 26 July 2022. You decide that the market has under-estimated the yield on long term Treasury bonds. You observe the following bond: Maturity Coupon Price Yield 15 May 2052 2.875 97.1340 3.007 Describe how you would use this bond to trade in order to profit from your beliefs.
If a firm is due to be paid in peso in two months, to hedge against exchange rate risk the firm should Question 4 options: 1) stay out of the exchange futures market. 2) buy foreign exchange futures long. 3) sell foreign exchange futures short. 4) none of the above.
An investor buys a European call option at a price of 7.6 yuan. The stock price is 52 yuan and the strike price is 55 yuan. Under what circumstances will the investor make a profit ? Under what circumstances will the option be executed ? Draw a diagram of the relationship between investor profitability and stock price at maturity.
Calculate the European call and put option on the basis of the following data: Consider the following facts regarding Bank Windhoek, which is publicly traded on the Namibian Stock Exchange (NSX): The current stock price is N $18, the exercise price is N $16, the duration of the option is 180 days, the volatility is 35%, and the risk-free rate is 8%. Show all your calculations. 1. What is the value of the European call option? 2. What is the value of the European put option? 3. Comment on the Value for both the European call & put options. 4. Why is a Black Scholes Merton model used to price options
Stock options, gold options and index options are examples of options where the underlying assets are stocks, gold and stock market index, respectively. What is the difference between European and American option? Are European options available exclusively in Europe and American options available exclusively in the United States? You own a call option on Intuit stock with a strike price of RM36. The option will expire in exactly three months’ time. If the stock is trading at RM46 in three months, what will be the payoff of the call? If the stock is trading at RM32 in three months, what will be the payoff of the call? Draw a payoff diagram showing the value of the call at expiration as a function of the stock price at expiration. Suppose that a June put option to sell a share for RM10 costs RM2 and is held until June. Under what circumstances will the seller of the option make a profit? Under what circumstances will the option exercised?
Assume that you buy some shares of Apple in the Philippines in pesos. Your friend in France buys some Apple shares in Europe in euros. Will your rate of return over the next year be the same as your friend’s? Is your market beta risk different from your friend’s risk? Explain
(a) Calculate the euro-based return an Italian investor would have realized by investing €10,000 into a £50 British stock. One year after investment, the stock pays a £1 dividend, and sells for £55 the exchange rate has changed from €1.25 per pound to €1.30 per pound. (b) Calculate the euro-based return an Italian investor would have realized by investing €10,000 into a £50 British stock using 50 percent margin. One year after investment, the stock pays a £1 dividend, and sells for £54. In the meantime, the exchange rate has changed from €1.25 per pound to €1.30 per pound. The interest on the margin loan is 1 percent per year. The margin loan was denominated in pounds.
Suppose that a stock price is currently 35 dollars, and it is known that four months from now, the price will be either 51 dollars or 29 dollars. Find the value of a European call option on the stock that expires four months from now, and has a strike price of 39 dollars. Assume that no arbitrage opportunities exist and a risk-free interest rate of 10 percent.Answer =dollars.
You live in a world where assets are priced by the CAPM. The following information is given to you regarding stock X. The expected payoff from the stock X=£105.00 Expected return of stock X = 18% Risk-free rate =5% Market Risk Premium = 9% Assume there are no other changes, except that the correlation between the returns of Stock X and the market becomes twice what it is currently. How would this change affect the current price of Stock X? Explain why the change of the correlation causes the observed change in the stock price. [hint: Provide a risk-based explanation]
Suppose your company needs to make a payment of 50 million Swiss franc one year from now, how would you hedge the foreign exchange risk in this payment with 125,000-Swiss franc futures contracts?
Suppose the European call and put options with strike price $20 and maturity date in 1 month cost $2.0 and $1.0, respectively. The underlying stock price is $18 and the risk-free continuously compounded interest rate is 8%. (a) Is there an arbitrage opportunity? (b)If yes, how would you implement arbitrage opportunity?