Suppose you are a euro-based investor who just sold Microsoft shares that you had bought six months ago.You had invested €10,000 to buy Microsoft shares for $120 per share; the exchange rate was $1.55 per euro.You sold the stock for $135 per share and converted the dollar proceeds into euro at the exchange rate of $1.50 per euro.How much of the return is due to the exchange rate movement?

Question

Quizplus · Accepted Answer

The return due to exchange rate movement is calculated by comparing the initial and final exchange rates. Initially, €10,000 was converted to dollars at $1.55 per euro, giving $15,500. Upon selling, the proceeds were converted back to euros at $1.50 per euro. The difference in exchange rates from $1.55 to $1.50 per euro represents the impact of exchange rate movement on the return. Specifically, if there had been no change in the stock price, the amount in euros after conversion at the new rate would be less than the initial €10,000 due to the weaker exchange rate ($1.50 per euro instead of $1.55). The actual calculation involves comparing the euro value of the proceeds at the new exchange rate to the original investment. The percentage change due to the exchange rate movement alone is 3.75 percent, indicating that a portion of the total return (or loss) is attributable to changes in the exchange rate rather than the performance of the stock itself.

Suppose You Are a Euro-Based Investor Who Just Sold Microsoft