Question

International investment returns Personal Finance Problem Joe Martinez, a U.S. citizen living in Brownsville, Texas, invested in the common stock of Telmex, a Mexican corporation. He purchased 3,000 shares at 20.50 pesos per share. Twelve months later, he sold them at 26.00 pesos 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 8.41 pesos per US$1.00 at the time of the purchase. At the time of the sale, the exchange rate was 8.82 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? %. (Round to two decimal places.) a. Joe's investment retum (in percentage terms) for the year, on the basis of the peso value of the shares is b. The purchase price per share in USS$ is $(Round to three decimal places.) (Round to three decimal places.) The sales price per share in US$ is $ c. Joe's investment retun on the basis of the US$ value of the shares is % (Round to two decimal places.) d. The two retuns differ: (Select the best answer below.)

Answer 1

a) Investment return (on the basis of Peso values)  =

= (Final Value -Inital Value)/Initial Value (As there is no dividend)

= (26-20.5)/20.5 = 0.26829 = 26.83%

b) Purchase price in US$ = 20.5 peso/share / 8.41 peso/dollar

= 2.438 $/share

Seling price in US$ = 26 peso/share / 8.82 peso/dollar

= 2.948 $/share

c)  Investment return (on the basis of US Dollar values)  =

= (Final Value -Inital Value)/Initial Value (As there is no dividend)

=(2.948-2.438)/ 2.438

=0.209336

= 20.93%

d) The two returns differ as these are measured in different currencies and exchange rate between Peso and Dollar keeps on changing. (Option D is correct)

The dollar based returns as calculated in C are important as Joe is a US Citizen and requires US Dollar for his daily needs and hence should be more concerned about Dollar based returns. Correct Option is B. This is because Joe has to bear the foreign exchange rate risk and hence he should be bothered about the returns in his own home currency.