# Suppose you are a euro-based investor who just sold microsoft shares

1. Suppose you are a euro-based investor who just sold Microsoft shares that you had bought six months ago. You had invested 10,000 euros to buy Microsoft shares for $120 per share; the exchange rate was $1.15 per euro. You sold the stock for $135 per share and converted the dollar proceeds into euro at the exchange rate of $1.06 per euro. First, determine the profit from this investment in euro terms. Second, compute the rate of return on your investment in euro terms. How much of the return is due to the exchange rate movement?

2. Mr. James K. Silber, an avid international investor, just sold a share of Rhone-Poulenc, a French firm, for FF50. The share was bought for FF42 a year ago. The exchange rate is FF5.80 per U.S. dollar now and was FF6.65 per dollar a year ago. Mr. Silber received FF4 as a cash dividend immediately before the share was sold. Compute the rate of return on this investment in terms of U.S. dollars.

3. In the above problem, suppose that Mr. Silber sold FF42, his principal investment amount, forward at the forward exchange rate of FF6.15 per dollar. How would this affect the dollar rate of return on this French stock investment? In hindsight, should Mr. Silber have sold the French franc amount forward or not? Why or why not?

4. Japan Life Insurance Company invested $10,000,000 in pure-discount U.S. bonds in May 1995 when the exchange rate was 80 yen per dollar. The company liquidated the investment one year later for $10,650,000. The exchange rate turned out to be 110 yen per dollar at the time of liquidation. What rate of return did Japan Life realize on this investment in yen terms?

5. At the start of 1996, the annual interest rate was 6 percent in the United States and 2.8 percent in Japan. The exchange rate was 95 yen per dollar at the time. Mr. Jorus, who is the manager of a Bermuda-based hedge fund, thought that the substantial interest advantage associated with investing in the United States relative to investing in Japan was not likely to be offset by the decline of the dollar against the yen. He thus concluded that it might be a good idea to borrow in Japan and invest in the United States. At the start of 1996, in fact, he borrowed ¥1,000 million for one year and invested in the United States. At the end of 1996, the exchange rate became 105 yen per dollar. How much profit did Mr. Jorus make in dollar terms?

6. From Exhibit 11.3 we obtain the following data in dollar terms:

Stock market |
Return (mean) |
Risk (SD) |

United States |
1.33% per month |
4.56% |

United Kingdom |
1.52% per month |
6.47% |

The correlation coefficient between the two markets is 0.57. Suppose that you invest equally, i.e., 50% each, in the two markets. Determine the expected return and standard deviation risk of the resulting international portfolio.

7. Suppose you are interested in investing in the stock markets of 7 countries–i.e., Canada, France, Germany, Japan, Switzerland, the United Kingdom, and the United States–the same 7 countries that appear in Exhibit 11.9. Specifically, you would like to solve for the optimal (tangency) portfolio comprising the above 7 stock markets. In solving the optimal portfolio, use the input data (i.e. correlation coefficients, means, and standard deviations) provided in Exhibit 11.4. The risk-free interest rate is assumed to be 0.5% per month and you can take a short position in any stock market. What are the optimal weights for each of the 7 stock markets? This problem can be solved using MPTSolver.xls spreadsheet.