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A investor invests 1,000 in risk-free British gilts, paying 9%per annum. At the time of making...

A investor invests 1,000 in risk-free British gilts, paying 9%per annum. At the time of making the investment the exchange rate was $2.5= £1.5At the end of the year the exchange rate is $1.85= £1. What return has the investor made? What is the broad point with it?

Solutions

Expert Solution

Step 1: Value of investment in pound

Value = $ 1000 / 2.50

          = 400 Pounds

Step 2: Value of investment at the end of year (in pounds)

Value at the end of year = Investment * ( 1 + Interest rate )

                                       = 400 * ( 1 + 0.09 )

                                       = 436 pounds

Step 3: Value of investment at the end of year (in dollars)

Value = 436 pounds * 1.85

          = $ 806.60

Step 4: Return earned

Return = [ 806.60 - 1000 ] / 1000

           = -19.34% Answer

It signifies that exchange rate plays a crucial role while determing the return from overseas investment.

jeff jeffy answered 1 year ago
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