Bema Gold is an exploration and production company that trades on the Toronto stock exchange.Assume that when purchased by an international investor the stock's price and the exchange rate were CAD5 and CAD1.0/USD0.72 respectively.At selling time,one year after the purchase date,they were CAD6 and CAD1.0/USD1.0.Calculate the investor's annual percentage rate of return in terms of the U.S.dollars if the investor had sold CAD5,the principal investment amount at the same time that the stock was purchased,forward at the forward exchange rate of CAD1/USD.80.

Question

Quizplus · Accepted Answer

First, we need to calculate the CAD/USD exchange rate at selling time, which is CAD1/USD1.0 as given. 
The return on investment is calculated as follows:

Return in CAD = (CAD6 - CAD5) / CAD5 = 20% 
Return in USD = Return in CAD * (CAD1 / USD1.0) / (CAD1 / USD0.80) - 1 
= 20% * 0.80 / 1.0 - 1 
= -0.136 or -13.60%

Therefore, the annual percentage rate of return in terms of the U.S. dollars is -13.60%, which is option C.

Bema Gold Is an Exploration and Production Company That Trades