Question

In: Finance

Dollar Return on Foreign Investments - (A) Over the past year, the dollar has depreciated by...

Dollar Return on Foreign Investments -

(A) Over the past year, the dollar has depreciated by about 10 percent against the euro. A year ago you took out a home equity loan in the U.S. at an interest rate of 8 percent and you invested the money in a German mutual fund that paid a 5 percent euro return. What net return did you earn on all of these transactions over the year? (PLEASE INCLUDE FORMULAS USED TO SOLVE PROBLEM).

(B) Over the past year, the dollar has appreciated by about 8 percent against the peso. A year ago you borrowed in the U.S. at an interest rate of 4 percent and you invested the money in a Mexican mutual fund that paid a 12 percent peso return. What net return did you earn on all of these transactions over the year? (PLEASE INCLUDE FORMULAS USED TO SOLVE PROBLEM).

Solutions

Expert Solution

(A) EUR to USD Exchange Rate 1 year ago = 1.119 EUR / $ or 0.894 $ / EUR (Data sourced from "Google Finance")

As the dollar has depreciated by 10 % against the euro in a year, it implies that 10 % more $ is purchasable today as compared to this time last year for one unit of euro.

Current Exchange Rate = 0.894 x 1.1 $ / EUR = 0.9834 $ / EUR or 1.0168 EUR / $

Let the home equity loan be of value $ 100000

Loan Liabiliy due after 1 year = 100000 x 1.08 = $ 108000

Euro Value of Loan = 100000 x 1.119 = $ 111900

Euro Value of Loan is invested at the German Mutual Fund return rate of 5 % to yield at present, an amount = 111900 x 1.05 = 117495 EUR

$ Value of Investment Yield = 117495 / 1.0168 = $ 115553.698

Net Profit = 11553.698 - 108000 = $ 7553.698

Net Return = (7553.698 / 100000) x 100 = 7.55 % approximately.

(B) Peso to USD Exchange Rate 1 year ago = $ 0.05579 / Peso (Data sourced from "Google Finance")

As the dollar has appreciated by 8 % against the peso in a year, it implies that 8% less $ is purchasable today as compared to this time last year for one unit of peso.

Current Exchange Rate = 0.05579 x 0.92 $ / Peso = 0.0513268 $ / Peso

Let the $ loan be of value $ 100000

Loan Liabiliy due after 1 year = 100000 x 1.04 = $ 104000

Peso Value of Loan = 100000 / 0.05579 = 1792435.92

Peso Value of Loan is invested at the Mexican Mutual Fund return rate of 12 % to yield at present, an amount = 1792435.92 x 1.12 = 2007528.231 Peso

$ Value of Investment Yield = 2007528.231 x 0.0513268 = $ 103040

Net Profit = 103040 - 104000 = - $ 960

Net Return = (-960 / 100000) x 100 = .- 0.96 %

jeff jeffy answered 2 years ago
Next > < Previous

Related Solutions

Dollar Return on Foreign Investments - (A) Over the past year, the dollar has depreciated by...
Dollar Return on Foreign Investments - (A) Over the past year, the dollar has depreciated by about 10 percent against the euro. A year ago you took out a home equity loan in the U.S. at an interest rate of 8 percent and you invested the money in a German mutual fund that paid a 5 percent euro return. What net return did you earn on all of these transactions over the year? (PLEASE INCLUDE FORMULAS USED TO SOLVE PROBLEM)....
Dollar Return on Foreign Investments - (A) Over the past year, the dollar has appreciated by...
Dollar Return on Foreign Investments - (A) Over the past year, the dollar has appreciated by about 8 percent against the peso. A year ago you borrowed in the U.S. at an interest rate of 4 percent and you invested the money in a Mexican mutual fund that paid a 12 percent peso return. What net return did you earn on all of these transactions over the year? (PLEASE INCLUDE FORMULAS USED TO SOLVE PROBLEM). (B) Explain the following statement:...
Dollar Return on Foreign Investments - (A) Over the past year, the dollar has appreciated by...
Dollar Return on Foreign Investments - (A) Over the past year, the dollar has appreciated by about 8 percent against the peso. A year ago you borrowed in the U.S. at an interest rate of 4 percent and you invested the money in a Mexican mutual fund that paid a 12 percent peso return. What net return did you earn on all of these transactions over the year? (PLEASE INCLUDE FORMULAS USED TO SOLVE PROBLEM). (B) Explain the following statement:...
Over the past year, the South African Rand has depreciated against the U.S. dollar by 5%....
Over the past year, the South African Rand has depreciated against the U.S. dollar by 5%. Furthermore, the inflation in the U.S. was at 4% over the year while the inflation in South Africa stood at 7% over the year. A. The U.S. exporters to South Africa have lost their competitive advantage relative to the local firms by about 3%. B. The U.S. exporters to South Africa have gained a competitive advantage relative to the local firms by about 2%....
The Australian dollar has depreciated a lot in recent years, leading to increased hope over the...
The Australian dollar has depreciated a lot in recent years, leading to increased hope over the impacts of the falling exchange rate on trade-exposed sectors of the economy. Examine the underlying drivers of this falling exchange rate and the implications of various policy options (with recent Reserve bank of Australia data to support your argument) that might be helpful for the economy.
A. Explain what has happened to the value of Dollar over the past 5 years.
A. Explain what has happened to the value of Dollar over the past 5 years.In relation to the currency in China, to the Euro, to the currency in India, and the Canadian dollar.B. Analyze results in Part A. Why do you think it went or down in value versus different currencies?
3. A What was the real rate of return over the past year (from one year...
3. A What was the real rate of return over the past year (from one year ago to today) for a stock if the inflation rate over the past year was 4.57 percent, the risk-free return over the past year was 6.99 percent, the stock is currently priced at 78.89 dollars, the stock was priced at 71.24 dollars 1 year ago, and the stock just paid a dividend of 2.47 dollars? Answer as a rate in decimal format so that...
In response to intensive foreign competition, the management of Florex Company has attempted over the past...
In response to intensive foreign competition, the management of Florex Company has attempted over the past year to improve the quality of its products. A statistical process control system has been installed and other steps have been taken to decrease the amount of warranty and other field costs, which have been trending upward over the past several years. Costs relating to quality and quality control over the last two years are given below: Costs (in thousands) Last Year This Year...
Foreign direct investments have surged with globalization in the past few decades. What are the benefits...
Foreign direct investments have surged with globalization in the past few decades. What are the benefits of FDI for the host country? Does foreign direct investment promote economic growth? How would FDI play a role in the economic growth of developing countries? Please give an example from world economies. Cite your references.
A portfolio generates the following returns over the past 10 years: Year Return (%) 1 -7...
A portfolio generates the following returns over the past 10 years: Year Return (%) 1 -7 2 -15 3 20 4 21 5 9 6 -6 7 15 8 23 9 2 10 -5 Calculate the test statistic to test whether the standard deviation of this portfolio's return is different from the benchmark portfolio standard deviation of 22. Enter answer accurate to 3 decimal places. Bonus thinking question: can you reject the hypothesis that the two standard deviations are equal?...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT