# Domestic currency return

If the exchange rate changes from 1 D/F to 1.2 D/F, what is the domestic currency return wrt foreign currency?

(1.2 - 1) / 1 = +20% logic: You invested in a forign currency at 1 D/F. Now your converting that investment in foreign currency back to Domestic at 1.2 D/F so you’ve earned 20% from currency appreciation of your foreign investment.

I’m pretty sure that’s wrong…you’re referring to the domestic return in the foreign currency, but he asked what the return on the domestic currency was. It cost \$1 to buy a unit of foreign currency, now it costs \$1.25 to buy a unit, so the FC got more expensive, and the D currency went down in value.

foreign appreciates so domestic return should fall I guess.

i actually would say that is right… since we do not know the actual return on the investment, the currency appreciated 20%, so when you translate back to domestic you are up 20% plus whatever the asset return was (i know that is not the exact calc but it is close)…

Original 1 unit of foreign currency bought 1 unit of domestic currency; now 1 unit of foreign currency buys you 1.2 units of domestic currency. The foreign currency has strengthened/appreciated, while the domestic currency has weakened/deppreciated. Let’s say the domestic currency is USD and the foreign is EUR…so 1 USD/EUR originally and now you have 1.2 USD/EUR. Foreign currency appreciated 20% Domestic currency depreciated 20%

cfaboston28 Wrote: ------------------------------------------------------- > so answer is -20%, correct? It would be +20%. Think of it as you first convert your investment into foreign currency at a 1 DC/FC rate. Your LMR was 0% and now after a year you want to convert your FC back to DC. The exchange rate now is 1.2 DC/FC so when you convert it back, you actually gained 20% due to currency changes even though your investment had 0% return.

deep, but domestic currency depreciates so doesn’t it mean your investment lose money on currency return. having a brain fart here…