Question

3. Some of the websites show graphs indicating how one currency has done relative to another currency a. Over the past year, how has the pound performed against the dollar? Does the dollar buy more or less pounds today than it did 1 year ago? b. Over the past year, how has the dollar performed against the yen? Does the dollar buy more or less yen today than it did 1 year ago? 4. Some of the websites provide information on the international indexes. a. How has the FTSE 100 (a U.K. stock index) performed over the past year? Calculate its return in local currency) over the past year. (Note: Index value is shown in local currency.) From your answer in question 3a, during this past year would a U.S. investor have earned more or less of a return calculated in dollars? Calculate the U.S. investor's approximate dollar return. (Assume that the U.S. investor had originally invested $1,000 in a FTSE 100 index fund at the beginning of the year but wants to liquidate the investment at the end of the year. Ignore any transactions costs.) b. How has the Nikkei 225 (a Japanese stock index) performed over the past year? Calculate its return (in local currency) over the past year. (Note: Index value is shown in local currency.) From your answer in question 3b, during this past year would a U.S. investor have earned more or less of a return calculated in dollars? Calculate the U.S. investor's approximate dollar return. (Assume that the U.S. investor had originally invested $1,000 in aN225 index fund at the beginning of the year but wants to liquidate the investment at the end of the year. Ignore any transactions costs.)

Answer 1

Solution:

3.

(a)

GBP to USD Chart 31 Mar 2019 00:00 UTC - 30 Mar 2020 19:25 UTC GBP/USD close: 1.23995 low:1.14353 high:1.34751 12h 10 1w 1.25 1M 1.20 1Y 2Y 1.15 sr 10Y 1.10 Apr Jun Aug Oct D ec Feb 20

1st April 2019: GBP/USD = 1.30214
30th March 2020: GBP/USD = 1.24232
Percent change = (1.24232 - 1.30214) / 1.30214 = -0.045939 or -4.59%

The movement of GBP/USD in last one year is shown in above graph. There was volatile movement and the pound touched the low of 1.14353 and high of 1.34751 during this period.
Over the past one year pound has deteriorated overall from 1GBP = 1.30214USD on 1st April 2019 to 1GBP = 1.24232USD on 30th March 2020. In this period the pound has declined by 4.59%.

As the pound has declined by 4.59% during this period which means that dollar has appreciated by same amount. So, the dollar buys more pound today than it did 1 year ago.

(b)

JPY to USD Chart 31 Mar 2019 00:00 UTC - 30 Mar 2020 19:36 UTC JPY/USD close:0.00927 low:0.00891 high:0.00980 12h 0.00970 1W 0.00950 1M 0.00930 1Y 2Y 0.00910 10Y 0.00890 Apr Jun Aug Oct Dec Feb 20

1st April 2019: JPY/USD = 0.00901
30th March 2020: JPY/USD = 0.00924
Percent change = (0.00924 - 0.00901) / 0.00901 = 0.025527 or 2.55%

The movement of JPY/USD in last one year is shown in above graph. There was less volatile movement and the JPY touched the low of 0.00891 and high of 0.00980 during this period.
Over the past one year JPY has appreciated overall from 1JPY = 0,00901USD on 1st April 2019 to 1JPY = 0.00924USD on 30th March 2020. In this period the JPY has appreciated by 2.55%.

As the JPY has appreciated by 2.55% during this period which means that dollar has depreciated by same amount. So, the dollar buys less Yen today than it did 1 year ago.

4.

(a)

+ Follow FTSE 100 Index INDEXFTSE: UKX 5,563.74 +53.41 (0.97%) + 30 Mar, 4:45 pm GMT+1 - Disclaimer 1 day 5 days 1 month 6 months YTD 1year 5 years Max 8,000 wwwmmmmmmm 7,000 6,000 5,000 7,317.38 1 Apr 2019 4,000 Jun 2019 Oct 2019 Feb 2020

1st April 2019: FTSE = 7317.38
30th March 2020: FTSE = 5563.74
Percent change = (5563.74 - 7317.38) / 7317.38 = -0.23965 or -23.97%

The movement of FTSE in last one year is shown in above graph. It was almost in same ballpark in the entire period with minor volatility but recently there was major decline due to Covid 19. FTSE touched the low of 4993.90 and high of 7686.60 during this period.

Over the past one year FTSE has declined overall from 7317.38 on 1st April 2019 to 5563.74 on 30th March 2020. In this period the FTSE has declined by -23.97%.
So, FTSE return (in local currency) over the past 1 year = -23.97%.

It is seen in part 3(a) that the pound has depreciated by 4.59% against USD. So, the US investor would have earned less return calculated in terms of dollars as at the end of period he has to exchange pounds to dollar at loss.

US investor's approximate dollar return:

Amount invested in FTSE in starting = 1000 USD
On 1st April 2019: GBP/USD = 1.30214
Therefore 1000 USD = 1000/1.30214 = 767.9666 GBP

As calculated above, FTSE return (in GBP) over the past 1 year = -23.97%.
Therefore, At the end of the year investment value = 767.9666 * (1 - 23.97%)
= 767.9666 * (1 - .2397)
= 583.885 GBP

On 30th March 2020: GBP/USD = 1.24232
So, 583.885 GBP = 583.885 * 1.24232 = 725.372 USD

Therefore US investor's approximate dollar return = (Ending dollar value of the investment - Starting dollar value of the investment)/ Starting dollar value of the investment
= (725.372 - 1000) / 1000
=-0.27462
=-27.46%

(b)

Nikkei 225 INDEXNIKKEI: N1225 + Follow 19.084.97 -304.46 (1.57%) + 30 Mar, 3:15 pm GMT+9 Disclaimer 1 day 5 days 1 month 6 months YTD 1year 5 years Max 24.000 21,509.03 1 Apr 2019 22,000 20,000 18,000 16,000 Jun 2019 Oct 2019 Feb 2020

1st April 2019: Nikkei = 21509.03
30th March 2020: Nikkei = 19084.97
Percent change = (19084.97 - 21509.03) / 21509.03 = -0.11269 or -11.27%

The movement of Nikkei in last one year is shown in above graph. The movement has been volatile over this period. Recently there was a major decline due to Covid 19 but now the index has recovered somewhat. Nikkei touched the low of 16552.83 and high of 24083.51 during this period.

Over the past one year Nikkei has declined overall from 21509.03 on 1st April 2019 to 19084.97 on 30th March 2020. In this period the Nikkei has declined by 11.27%.
So, Nikkei return (in local currency) over the past 1 year = -11.27%.

It is seen in part 3(b) that the Yen has appreciated by 2.55% against USD. So, the US investor would have earned more return calculated in terms of dollars as at the end of period he has to exchange yen to dollar at profit.

US investor's approximate dollar return:

Amount invested in Nikkei in starting = 1000 USD
On 1st April 2019: JPY/USD = 0.00901
Therefore 1000 USD = 1000/0.00901 = 110987.7913 JPY

As calculated above, Nikkei return (in JPY) over the past 1 year = -11.27%.
Therefore, At the end of the year investment value = 110987.7913 * (1 -11.27%)
= 110987.7913 * (1 -0.1127)
= 98479.46726 JPY

On 30th March 2020: JPY/USD = 0.00924
So, 984794.6726 JPY = 98479.46726 * 0.00924 = 909.9503 USD

Therefore US investor's approximate dollar return = (Ending dollar value of the investment - Starting dollar value of the investment)/ Starting dollar value of the investment
= (909.9503 - 1000) / 1000
=-0.0901
=-9.01%