Suppose that a U.S. firm converts dollars into pounds in order to invest in a British enterprise in the U.K. A year later, the return on the investment is 12 percent in terms of pounds. If, during that period, the dollar appreciated against the pound, then the return on the investment in dollar terms would be

Question

Quizplus · Accepted Answer

When the dollar appreciates against the pound, the value of the pound decreases relative to the dollar. Therefore, when converting the investment returns back to dollars, the investor receives fewer dollars per pound than initially invested, leading to a return in dollar terms that is less than the 12 percent return in terms of pounds.

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