Last year, you used $15,000 to buy shares in a Canadian corporation. At the time of your investment, the stock sold for C$40/share and the exchange rate was C$ = $1.5. Today, you sold all your shares at the current price of C$45/share. The current exchange rate is C$ = $1.1, which means you received a total of $12,375 from selling your shares. This loss of value is an example of exchange rate risk.
True or False?
| True, it is an example of exchange rate risk. | |||||||||
| We have $15,000 which is equals to C$10,000 (15,000/1.5) | |||||||||
| Price of share C$40/ Share. | |||||||||
| Hence, we can purchase 250 shares (10,000/40). | |||||||||
| Now, shares price has increase to C$45/ Share. | |||||||||
| Hence there is a gain of C$ 5 per share which results into total gain of $ 1,250 and will receives total proceeds of C$ 11,250 (250*45) | |||||||||
| If, we convert the proceeds into US$ at the rate of $1.5/ C$, then we would have received $16,875 (1.5*11250), thereby gain of $1,875. | |||||||||
| However, there is canadian dollar appreciates which means we will receive less US$, thereby resulting in loss. |
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