Question

Joe Martinez, a U.S. citizen living in Brownsville, Texas, invested in the common stock of Telmex, a Mexican corporation. He purchased 4,000 shares at 21.00 pesos per share. Twelve months later, he sold them at 29.75 pesos International investment returns Personal Finance Problem per share. He received no dividends during that time. a. What was Joe's investment return (in percentage terms) for the year, on the basis of the peso value of the shares? b. The exchange rate for pesos was 9.87 pesos per US$1.00 at the time of the purchase. At the time of the sale, the exchange rate was 10.34 pesos per US$1.00. Translate the purchase and sale prices into US$. c. Calculate Joe's investment return on the basis of the US$ value of the shares. d. Explain why the two returns are different. Which one is more important to Joe? Why? a. Joe's investment return (in percentage terms) for the year, on the basis of the peso value of the shares is %. (Round to two decimal places.) b. The purchase price per share in US$ is $ (Round to three decimal places.) The sales price per share in USS is $ (Round to three decimal places.) c. Joe's investment return on the basis of the US$ value of the shares is %. (Round to two decimal places.) d. The two returns differ: (Select the best answer below.) O A. due to the change in exchange rate between the peso and the dollar. O B. because of the amounts sold. OC. because of the timing of the sale. OD. due to the risk of the stock. Which one of the two returns is more important to Joe? Why? (Select the best answer below.) O A. The return in part a is more important because Joe should only be concerned with carrying stock risk not exchange rate risk. OB. The return in part a is more important because Joe bought the stock in pesos O C. The return in part c is more important because as an investor in foreign securities, Joe must carry foreign exchange rate risk. OD. The return in part c is more important because Joe is thinking of becoming a US citizen.

Answer 1

1. Investment return= [(P₁-P₀+D)/P0]*100 Where P₁= Selling price, P₀- Investment price and D= Dividend received.

Given,

No. of shares purchased: 4,000

Purchase price per share (P₀): 21 pesos

Selling price per share (P₁): 29.75 pesos

Dividend received (D): Nil

Substituting these values, Investment return= [(29.75-21+0)/21]*100 = (8.75/21)*100 = 41.67%

2. Given, Exchange rate at the time of purchase =9.87 pesos per 1US$

Exchange rate at the time of sale=10.34 pesos per 1US$

Therefore, Purchase price per share in US$ (P₀)= Price in pesos/Exchange Rate = 21/9.87 = $2.128

Sales price in US$ (P₁) = Sales price in pesos/Exchange rate= 29.75/10.34= $2.877

(c ) Investment return on the basis of US$ value= [(2.877-2.128)/2.128]*100

= (0.749/2.128)*100 =35.20%

(d ) The two returns differ because of the change in exchange rate between the peso and the dollar. Hence the answer is option A of the given set

Joe is a US Citizen and the investment is made in Mexican security. The return in part c is more important because as an investor in foreign security, Joe must carry foreign exchange rate risk. Hence the answer is option C of the given set.