Question

Compute the effective return to a US investor who purchased the FTSE Index during the year when the index gained 18 % and given the dollar price of the pound was $1.4565 at the beginning of the year and $1.4875 at the end of the year.

It says the answer is 20.51%

Answer 1

Given,

Index gain = 18% or 0.18

Beginning price = $1.4565

Ending price = $1.4875

Solution :-

Increasing rate = (ending price - beginning price) beginning price

= ($1.4875 - $1.4565) $1.4565

= $0.031 $1.4565 = 0.02128389975

Now,

Effective return = [(1 + index gain) x (1 + increasing rate)] - 1

= [(1 + 0.18) x (1 + 0.02128389975)] - 1

= [(1.18) x (1.02128389975)] - 1

= 1.2051 - 1 = 0.2051 or 20.51%