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 initial investment was €10,000, which converted to $15,500 (10,000 * 1.55). You bought shares at $120, so you bought 129.17 shares (15,500 / 120). You sold these shares at $135, receiving $17,458.33 (129.17 * 135). Converting this back to euros at $1.50 per euro gives €11,638.89 (17,458.33 / 1.50). The total return in euros is €1,638.89 (11,638.89 - 10,000), which is a 16.39% return. Without exchange rate change, the return would have been 12.50% (135/120 - 1). The difference due to exchange rate is 3.75% (16.39% - 12.50%).

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