Question

You have uncovered what sounds like a great investment opportunity. You can purchase an investment in...

You have uncovered what sounds like a great investment opportunity. You can purchase an investment in Germany with an estimated holding period return of 15%. Your next best opportunity in the United States (your home country) has an expected holding period return of only 9 ½%. At the beginning of the investment horizon, the exchange rate is $1.15 EURO/USD and at the end it is $1.10 EURO/USD. How well did you actually do, in home country terms, if the expected holding period returns become reality?

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Answer #1

Lets assume that the investment is of $10000 with a similar holding period

So the investment in Euros term at spot exchange rate of $1.15 Euro/USD would be = 10000/1.15 = 8,696 Euros

Return on investment is 15% = 8696*15% = 1,304 Euros

The total value of investment = 8696+1304 = 10,000 Euros

Value of investment in USD terms at spot exchange rate of $1.1 Euro/USD= 10000*1.1= 11,000 USD

Now, the value of investment if it was made in United States at 9.5% return = 10000*(1+return rate)

=10000*1.095 = $10950

So the investment in Germany as compared to in US does better by ((11000/10950)-1) = 0.45%

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