Question

2 Suppose you are a U.S. investor who is planning to invest $785,000 in Mexico. Your Mexican investment gains 10 percent. If the exchange rate moves from 12.2 pesos per dollar to 12.5 pesos per dollar over the period, what is your total return on this investment?

Answer #1

Initial investment = $785000

Investment in peso = $785000 * 12.2 = 9577000 peso

Return on investment = 9577000 * 10% = 957700 peso

Value of investment = 9577000 + 957700 = 10534700 peso

Now, this investment will be converted back to dollars at 12.5 rate:

Value of investment in dollars = 10534700 / 12.5 = $842776

**Total return on investment = Value of investment after
appreciation - Initial value**

Total return on investment = $842776 - $785000 = $57776

**Total return (%) = Total return on investment / Initial
value * 100**

Total return (%) = $57776 / $785000 * 100 = 7.36%

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