Q6.5 Identify and briefly describe the three sources of return to U.S. investors in foreign stocks. How important are currency exchange rates? With regard to currency exchange rates, when is the best time to be in foreign securities?

a. Listed below are exchange rates (for the beginning and end of a hypothetical 1-year investment horizon) for three currencies: the British pound (BE), Australian dollar (A$), and Mexican peso (Mp). Beginning of Currency Investment Horizon Currency Exchange Rates at End of One-Year Investment Horizon British pound (B) Australian dollar (A$) 1.55 U.S.$ per B 1.75 U.S.$ per B Mexican peso (Mp) 1.35 A$ per U.S.S 0.10 U.S.$ per Mp 1.25 A$ per U.S.$ 0.08 U.S.$ per Mp From the perspective of a U.S. investor holding a foreign (British, Australian, or Mexican) stock, which of the above changes in currency exchange rates would have a positive effect on returns (in U.S. dollars)? Which would have a negative effect?

b. ADRs are denominated in U.S. dollars. Are their returns affected by currency exchange rates? Explain.