Question

Assume that you have invested $100,000 in Japanese equities. When purchased the stock's price and the exchange rate were ¥100 and ¥100/$1.00 respectively. At selling time, one year after purchase, they were ¥110 and ¥110/$1.00. If the investor had sold ¥10,000,000 forward at the forward exchange rate of ¥105/$1.00 the dollar rate of return would be:

A)-9.09%

B)4.76%

C)28.00%

D)-27.27%

Answer 1

On maturity, the investor will purchase Yen 10,000,000 @market rate, i.e., Yen 110 per US$ and sell these at the forward rate of Yen 105 per US$.

Dollars paid at time of purchase = Yen 10,000,000 / Yen 110 per $ = $90,909.090909

Dollars received at time of sale = Yen 10,000,000 / Yen 105 per $ = $95,238.095238

Return as a % = [ (Sale value - Purchase value) / Purchase value ] x 100

or, Return as a % = [ ($95,238.095238 - $90,909.090909) / $90,909.090909 ] x 100 = 4.761904761% or 4.76% (Option B)