You just bought some ADRs of GSK You expect that the shares

You just bought some ADRs of GSK. You expect that the shares of the company, currently trading on the London Stock Exchange at 40 GBP per share, will appreciate over the next year by 12.27%. You expect that over the same time period, the value of the British pound (GBP), which is currently trading at 1.25 USD/GBP, will depreciate by 12.31% relative to the USD. What is the net rate of return that you expect on your ADRs for the next year? (Enter answer in percents, to two decimal places.)

Solution

Current price of 1 ADR = 40 GBP

Current rate 1 GBP = 1.25 USD

In Term of USD, 1 ADR = 40*1.25 = 50 USD

Next year,

Price will appreciate by 12.27%. So, 1 ADR = 40*(1+12.27%) = 44.908 GBP

The GBP will depreciate by 12.31% relative to USD

1 GBP = 1.25*(1-12.31%) = 1.096125 USD

So, New price of 1 ADR = 44.908*1.096125 = 49.22

The rate of return = (49.22-50)/50 = -1.56%

Hence, share has depreciated by 1.56%