Question

Assume that you have invested $100,000 in Japanese equities. When purchased, the stock's price and the exchange rate were ¥100 and ¥100/$1.00 respectively. At selling time, one year after purchase, they were ¥110 and ¥110/$1.00. If the investor had sold ¥10,000,000 forward at the forward exchange rate of ¥105/$1.00 the dollar rate of return would be

Answer 1

Answer:

4.76%

Explanation:

The computation of dollar rate of return is shown below:-

Initial investment in USD = 100,000        

Converted to Japanese Yen at Yen 100 ÷ 1 USD = 10,000,000      

Stock Price in Yen = 100        

Number of shares purchased = 100,000

At year end sale price at 110 = 11,000,000

Out of this proceed, the investor will sold 10,000,000 Yen as per Forward contract at 105 Yen/USD and rest 1,000,000 at 110 Yen/USD

Dollar Proceed                                  Equivalent USD

10,000,000 Yen at 105 Yen/USD        95,238

(10,000,000 ÷ 105)

1,000,000 Yen at 110 Yen/USD            9,091

(1,000,000 Yen ÷ 110)

Dollar proceed                                       104,329

Return as a Percentage = ((Sale value - Purchase value) ÷ Purchase value) × 100

= (($95,238 - $90,909) ÷ $90,909) × 100

= $4,329 ÷ $90,909 × 100

= 4.76%