A U.S. investor purchased some shares in Germany for 25 euros and sold them a year later for 42 euros. If at the beginning of the year the exchange rate was $1.20/euro and at the end of the year the exchange rate was $1.05/euro, what return did this investor earn in U.S. dollars?
The correct answer is: a)
(Return in US$)
= (1 + Return on Foreign Currency) x (1 + Return on Investment in Foreign Currency) - 1
Therefore, (1 + Return on Foreign Currency) = ($1.05/euros) ÷ ($1.20/euros) = 0.875
and (1 + Return on Investment in Foreign Currency) = 42 euros ÷ 25 euros = 1.68
Thus, (Return in US$) = (0.875)(1.68) - 1
= 0.47 or 47%
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