Question
The objective is to evaluate an investments rate of return when adjusting for foreign exchange rates. (Problem 21-5 / Please see below). I have learned
The objective is to evaluate an investments rate of return when adjusting for foreign exchange rates. (Problem 21-5 / Please see below).
I have learned that in todays global economy, businesses and investors have the opportunity to create wealth for their firms or themselves. The same concepts that apply to wealth maximization in domestic countries apply to international business ventures. Financial markets have matured globally allowing for the free flow of funds to occur. The one factor, however, that must be considered is exchange rates. Depending of the exchange rate of a country, rates of return on an investment can be either positive or negative. Therefore, understanding how to calculate rates of return when adjusting for exchange rates is important for succeeding in international markets.
- How might one complete problem 21-5 using formula's?
An investor in the United States bought a one-year Brazilian security valued at 195,000 Brazilian reals. The U.S. dollar equivalent was 100,000. The Brazilian security earned 16 percent during the year, but the Brazilian real depreciated 5 cents against the U.S. dollar during the time-period ($0.51 to $0.46). After transferring the funds back to the United States, what was the investor's return on her $100,000? Determine the total ending value of the Brazilian investment in Brazilian reals and then translate this Brazilian value to U.S. dollars. Then compute the return on the $100,000. | |||||||
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Information | |||||||
Initial security value | 195,000 | Brazilian reals | |||||
Initial security value | $100,000 | U.S. Dollars | |||||
Brazilian interest rate | 16% | ||||||
a. Brazilian security value after one year | Formula ?? | ||||||
b. U.S. dollar equivalent | Formula ?? | ||||||
c. Rate of return | Formula ?? |
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