Finance: Mutual Fund and Share Price

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3209AFE INTERNATIONAL FINANCE

Tutorial 6 Questions

Question 1

Eastbridge, a U.S. based company purchased 100 000 shares of Cambridge, a British company a year ago. Eastbridge has decided to sell all the shares in one month time to finance the company other operation. Eastbridge expects the share price of Cambridge to be £7.00 in one month time. To hedge against exchange rate exposure, Eastbridge sold £ forward contract at the forward rate of US$1.63 based on the expected share price of £7.00. a) What is the amount of £ to be sold in the forward contract?

b) How much will Eastbridge receive (in US$) if the share price of Cambridge is £7.00 in one month time?

c) How much will Eastbridge receive (in US$) if the share price of Cambridge is £6.00 and the spot rate is US$1.68 in one month time?

d) How much will Eastbridge receive (in US$) if the share price of Cambridge is £7.50 and the spot rate is US$1.60 in one month time?

e) What will happen if in one month time, share price of Cambridge drop to £5.00 and Eastbridge decided to hold on to the shares and sell at a later date when the share price is more favourable? Assume that the spot rate in one month time is US$1.68.

Question 2

What types of risk are present in a portfolio? Which type of risk remains after the portfolio has been diversified?

Question 3

How, according to portfolio theory is the risk of the portfolio measured exactly?

Question 4

Discuss about the integration of market worldwide and its impact on international portfolio diversification.

Question 5

Giri Lyer is a European analyst and strategist for Tristar Funds, a New York-based mutual fund company. Giri is currently evaluating the recent performance of shares in Pacific Wietz, a publicly traded specialty chemical company in Germany listed on the Frankfurt DAX. He gathers the following quotes:

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