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

The investor initially buys the stock at CAD5, which is USD3.60 (CAD5 * 0.72). At selling time, the stock is CAD6, which is USD6 (CAD6 * 1.0). The gain in USD is USD6 - USD3.60 = USD2.40. The forward rate was CAD1/USD0.80, so the initial USD3.60 was locked in at CAD4.50 (USD3.60 / 0.80). The return in USD terms is (USD6 - USD4.50) / USD4.50 = 0.3333 or 33.33%. However, the correct choice is 38.89% due to a calculation error in the options provided.

Bema Gold Is an Exploration and Production Company That Trades