Q:

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?
A) 47.0%
B) 92.0%
C) 55.5%
D)

A:

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%



RELATED FAQS

  1. When and why did the euro make its debut as a currency?

    On January 1, 1999, the European Union introduced its new currency, the euro. Originally, the euro was an overarching currency ...
  2. How do you make money trading money?

    Investors can trade almost any currency in the world. Investors, as individuals, countries, and corporations, may trade in ...
  3. You observe the following exchange rates in the following markets ...

    Free info on financial certification exams including study guides, exam questions, and much more!
  4. Why doesn't England use the euro?

    Understand why the United Kingdom has opted to not join the eurozone in adopting the euro over the pound sterling as its ...
  5. What is foreign exchange?

    Foreign exchange, or Forex, is the conversion of one country's currency into that of another. In a free economy, a country's ...
RELATED TERMS
  1. Annualized Total Return

    The average amount of money earned by an investment each year ...
  2. International Currency Exchange Rate

    The rate at which two currencies in the market can be exchanged. ...
  3. Euro Deposit

    The equivalent of a money market rate on cash deposits made in ...
  4. Uncovered Interest Arbitrage

    A form of arbitrage that involves switching from a domestic currency ...
  5. Covered Interest Rate Parity

    This term refers to a condition where the relationship between ...
  6. Foreign Exchange Reserves

    Foreign exchange reserves are reserve assets held by a central ...
Trading Center