A French investor earned a 12% return, in terms of Euros, on an investment in dollar assets in the U.S. If the return on the investment in dollars was 6%, then the change in the exchange rate: A) must have been greater than 6%. B) must have been equal to 6%. C) must have been less than 6%.
C: S = (1+12%)/(1+6%)-1=5.66%
C; capital return also gets the currency appreciation…
Your answer: C was correct! The equation for total return in euros = ( return) + (change in exchange rate) + ( return)(change in exchange rate). Thus, 0.12 = 0.06 + (change in exchange rate) + (0.06)(change in exchange rate), 0.12 - 0.06 = (change in exchange rate) + (0.06)(change in exchange rate) 0.06 = (1.06)(change in exchange rate) 0.06/1.06 = change in exchange rate = 0.0566 or 5.66% < 6%.
Forex is slippery.
ditto
Ah took too long to reply. haha
schweser 3 day showed us a great shortcut…just chain link the returns. For example, if you already knew the change in rate were 5.66%: (1.0566 * 1.06 = 1.12)-1 = 12% Just as easy to back into this problem: 1.12/1.06 = 1.0566