Calculate the expected return on the US stock

Reference no: EM132202067

Question - Suppose that you are an investor based in Denmark, and you expect the U.S. dollar to depreciate by 3% over the next year. The interest rate on one-year risk-free bonds is 4.5% in the United States, and 3.75% in Denmark. The current exchange rate is DKr 6.35 per U.S. dollar. You buy some U.S. stocks with an expected return of 7% in dollars.

a. Calculate the foreign currency risk premium from the Danish investor's viewpoint. Please briefly explain your answer.

b. Calculate the expected return on the U.S. stock from the Danish investor's viewpoint, that is, in Danish krone. Please briefly explain your answer.

c. Calculate the risk premium on the U.S. stock from a U.S. viewpoint and from the Danish investor's viewpoint. Please briefly explain your answer.

d. Calculate the expected return on the U.S. stock from the Danish investor's viewpoint, assuming that the Danish investor hedges the currency risk. Calculate the risk premium on the hedged U.S. stock from the Danish investor's viewpoint. Please briefly explain your answer.

Reference no: EM132202067

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