Question

Suppose the value of the euro is very high compared to the value of other major currencies. And the value of the euro is expected to fall in a few years. Will foreign portfolio investment in France increase? Explain your answer.

Answer 1

Depreciation of currency means that the value of currency reduces relative to another currency. For example, if $1 is equal to 1.2 Euro and in future Euro is expected to fall to say $1 = 1.3 Euro, then it means that the value of Euro decreased. Earlier $1 could be bought for just 1.2 Euro. But after the fall, 1.3 Euro needs to be paid.

In any foreign investment, there is also a risk of foreign exchange. Unfavorable movements can cause loss even when the foreign asset may have positive returns.

When an investor invests in Euro based assets, and Euro is expected to fall then it means when the investor would convert Euro back to his/her own currency then he /she would get less. Thus the return would reduce.

So, investment in France is expected to fall as the overall return for the investor would fall.

Comment in case of any doubt.