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

Question

Quizplus · Accepted Answer

First, let's calculate the yen rate of return:

Yen rate of return = (Ending Price - Beginning Price + Dividends) / Beginning Price 
Yen rate of return = (110 - 100) / 100 = 10%

Now, let's calculate the dollar rate of return:

Dollar rate of return = (Yen rate of return + Change in Exchange Rate) / Beginning Exchange Rate 
Dollar rate of return = (10% + ((105 - 100) / 100)) / 100 
Dollar rate of return = 0.1433 or 14.33%

Note that the investor had sold ¥10,000,000 forward, which means they locked in the exchange rate of ¥105/$1.00. Therefore, the change in exchange rate does not affect their return.

The correct answer is B, 4.33 percent.

Assume That You Have Invested $100,000 in Japanese Equities