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.
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"
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.
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?