Local currency depreciation against the dollar has been a frequent occurrence for U.S. investors in emerging markets. U.S. investors have consistently seen large percentages of their returns erased by currency depreciation. This is true even for long-term investors. Correct/Incorrect?
Incorrect… Over the long-term Currencies exhibit reversion to the mean so gain/loss attributed to Currency over teh LT is very low close to 0.
I agree with you. Also the last few years Dollar has declined relative to most other currencies. However, the CFAI answer was “Correct” in 2003. Refer CFAI 2003 AM Exam. Q4.2.
Currencies exhibit reversion to the mean if PPP holds. We are told in all the materials that PPP holds in the long-run, not the short-run. So how is it that the statement can be correct for long-term investors?
I’m calling CFAI out on that one! JOEYD where are you…need some reinforcements.
Correct… cause CFAI says so!
Maybe they refer to currency deevaluations which are frequent in Emerging Markets.
tanyusha Wrote: ------------------------------------------------------- > Maybe they refer to currency deevaluations which > are frequent in Emerging Markets. I remember the phrase that “Losses are frequent because of currency devaluations” something a long those lines…
bigwilly Wrote: ------------------------------------------------------- > Incorrect… Over the long-term Currencies exhibit > reversion to the mean so gain/loss attributed to > Currency over teh LT is very low close to 0. Mean reversion… umm umm some one did CFAI 2005 exam lol
haha is that where its from 
at least it stuck .
CareerChange Wrote: ------------------------------------------------------- > Local currency depreciation against the dollar has > been a frequent occurrence for U.S. investors in > emerging markets. U.S. investors have consistently > seen large percentages of their returns erased by > currency depreciation. This is true even for > long-term investors. > > Correct/Incorrect? When they say LOCAL aren’t they referring to the FOREIGN currency? And use BASE or DOMESTIC currency, when referring to the currency of the investor. If so, local or foreign currency depreciation will weigh negatively on the investor’s returns, and the statement is true. If the pound depreciates against the dollar, a US investor will get fewer dollars when those pounds are exchanged for dollars. Conversely, a UK investor will get more pounds for her dollars, and her return will be higher after the exchange.
Abacus, yes in reference to LOCAL…BUT the CFAI books state that over the long term currency risk is very minimal. That’s why I said incorrect.
I wish Euro would mean revert… but FX does erase your return even in the long run - especially during the massive FX adjustment (usually a devaluation :))… think real life examples guys- not just CFA says so- RUB pre-1998 you could hold your assets at RUB5/$ now after series of appreciations it is still at 23.81. BRL used to be at parity to the dollar… and many many more…
You are right. I guess the question should state the returns for the long-term investors are volatile, instead of saying that a larger % of their returns are bad over their investment horizon.
no, that is why you are paid top $$ to watch for deval and avoid it you can also make a more big $$ if you make a right call and hedge (some people retired after russia and south africa deval :))
BUt we are supposed to answer the CFAI WAY! GRRR…
eliapa Wrote: > > think real life examples guys- not just CFA says > so- RUB pre-1998 you could hold your assets at > RUB5/$ now after series of appreciations it is > still at 23.81. BRL used to be at parity to the > dollar… and many many more… Our charter comes from CFAI, not from Mr. or Ms. Market!!
yes Abacus, but this is what CFAI ALSO says - investors can loose on their foreign currency returns in even in the long run. they are not just a bunch of book people, otherwise your exam would still resemble 2000 …or may be even 1990 (and as CSK - i think- pointed out you would breeze through it)
Yes but See I believe Exam 2005…
yeah that is what CFA said -as Career Changer commneted for 2003…OR, did they say diff in 2005? that wud b v funny, one year one answer another year anthr…