Question

1) In September 2014, a U.S. investor chooses to invest $500,000 in German equity securities at a then current spot rate of $1.25/euro.  At the end of one year the spot rate is $1.45/euro.  How many German equity shares will the U.S. investor acquire with his initial $500,000 investment if the cost at purchase was €50?

2) What dollar return (in %) does an investor earn if they sell shares for €57 and the share cost at purchase was €50, given that the exchange rate has risen from $1.25/euro to $1.45/euro?

Answer 1

1) Invested amount = $ 500000

Spot exchange rate = $ 1.25

Amount invested in german = 500000/ 1.25 = EUR 400000

Number of German equity shares = Amount invested / Price per share = EUR 400000/ 50 = 8000 shares

2) If he sell the share at EUR 57

Total value realised = number of shares * price per share = 8000*57 = EUR 456000

Amount realised in USD ( end of year spot rate will be taken ) = EUR 456000*1.45 = $ 661200

Dollar return = Gain eraned in $ / amount invested

= (661200- 500000) / 500000

= 161200/500000 = 0.3224 = 32.24%