$\begin{array}{|l|l|l|}
\hline & \text { Start of period } & \text { End of period } \
\hline \text { Investment value (USD) } & \$ 1000 & \$ 1200 \
\hline \text { Exchange rate (AUD/USD) } & 1.3500 & 1.3500 \
\hline
\end{array}$
-An Australian investor purchases a European-based investment at a price of EUR52.50 when the exchange rate was EUR0.6500/AUD.If the investment is sold for a price of EUR55.00 and the investor's AUD discrete return was 10%,what was the exchange rate when the investment was sold?

Question

Quizplus · Accepted Answer

The EUR return on the investment is (55.00/52.00)- 1 = 0.0577 or 5.77%.Using equation 3.1,page 90,we can solve for the percentage change in the foreign exchange rate.That is 0.10 = (1.0577)(1+%F1F1F1S1F1F1F10S)- 1.Therefore,the change in the exchange rate (%F1F1F1S1F1F1F10S)is 0.400 or 4.00%.That is,the EUR must appreciate against the AUD by 4% over the period.We therefore invert the starting exchange rate to obtain the AUD in terms of EUR as per 1/0.6500 = 1.538.This rate must increase over the period by 4% to (1.538)(1.04)= 1.6000.

-An Australian Investor Purchases a European-Based Investment at a Price