# Exchange rate question - confused!

My wife has an option to buy Wal-Mart shares in a couple of years time at
20% below what they were valued at last year.
Talking about a run on the pound as a result of the coalition government
here, I joked "good, good, the weaker the pound the better" and when I was
asked why I explained about the shares to be bought in dollars.
"But you want a strong pound" I was told by more than one person.
Which has now confused me.
So which is better for my wife, a weak £-\$ rate or a strong one?
It depends on what she would intend to do with them.
There is an unstated expectation that the shares will be worth more in a couple of years time than what they were worth last year. Suppose they were valued at 100 cents last year and will be valued at 120 cents when she has the opportunity to exercise the option.
So what she could do is buy as many as she likes for 80c each and then immediately sell them for 120c thereby making a 50% instant profit (minus dealing expenses and exchange rate losses).
In this case it would make no difference whether the pound is strong or weak, since the exchange rate will presumably move very little between when she buys and re-sells. She will simply make 50% on however much she invests. On the other hand, if the options are limited to a certain maximum number of shares, e.g. if she is allowed to buy no more than 2000 shares at 80c, her investment ceiling will be \$1600. To maximise her profit in pounds, a weak pound would be to her advantage because her investment ceiling in pounds would be higher.
Alternatively, she might wish to buy the shares and hold on to them for a longish time in order to derive income from dividends. In that case a strong pound would be good because she could then buy her \$1600 worth of shares for a smaller pound sum. Once the shares have been bought, she yjem wants the pound to weaken so that the dividends (fixed each year in cents per share) will be worth more in pounds. Likewise, by the time she ultimately wants to sell them, she wants the pound to be as weak as possible in order to get more pounds or them.
She intends to sell straightaway; she has the option to buy 666 shares at \$27.05.
Then you were right, she wants the pound to be weak at the time she buys and sells them, assuming that she has (will have, or can get) enough pounds with which to buy the \$18000 with which to pay for all 666 shares.
Thanks for confirming my initial thoughts (and damn the muppets I work with, who are allowed a vote I might add, who believed otherwise).
She has the money, it's a sharesave scheme, she contributes via a deduction in her salary each month so at the end of the period she simply buys and sells in one transaction or, if the shares are worth less than they were at the start of the term, takes her contributions plus bonus.
On May 19, 7:42 pm, "Justin Credible" wrote:
Are her contributions accumulated in dollars or in pounds? That migh alter how you view a falling pound. IN my employer's scheme my monthly contributions are converted to dollars month by month and stored in dollars.
Robert
They're accumulated in sterling. At the end of the period, she buys her 666 shares at \$27.05 and, for ease of maths, assuming the shares are trading at \$37.05 at the time, sells them in the same transaction, making \$10 x \$666.
She receives a cheque in US dollars which is then where the exchange rate comes in (not to mention her bank charging some exorbitant fee for paying in a non-sterling amount).
"Justin Credible" gurgled happily, sounding much like they were saying:
666 x \$27.05 = \$18.015.30 Profit = 666 x \$10 = \$6,660
£1 = \$1. Profit = £6,660
£1 = \$2 Profit = £3,330
Obviously, the weak pound wins out there.
BUT - if the contributions are banked in £ until the day of the \$ purchase, how much is actually being saved? Enough to buy the full pile of shares if the purchase price is £18,015.30? What happens to the other £9,007.65 if the exchange rate means the purchase price is £9,007.65? Returned without interest or profit, presumably?

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