Foreign financial markets 1. A US investor purchased stock in a Canadian company
ID: 2620709 • Letter: F
Question
Foreign financial markets
1. A US investor purchased stock in a Canadian company on May 1, 2018 for C$82.15. The investor sold the stock on June 29 for C$88.75. What is the investor’s percentage return on the investment in Canadian dollars?
2. If the exchange rate for the Canadian dollar wat 1.2940 on May 1 and 1.2268 on June 29, what is the investor’s percentage return on the investment in US dollars?
3. How should an investor whose investment portfolio consists solely of domestic investments expect the risk of the portfolio to change if the investor adds foreign investments to the portfolio? Explain.
4. Name two ways a US investors can include foreign investments in their investment portfolios without the need to buy or sell investments in foreign securities markets.
Explanation / Answer
1)
Purchase price of Stock= C$82.15, on 1st-May'18
Sale price of Stock = C$88.75, on 29th-June'18
Holding Period= 1st-may to 29th-June.= 59 days
Profit= 88.75-82.15 = C$6.60
Return= (Profit/ Purchase price)*(holding period/365)*100
=(6.6/82.15)*100
8.034%
Annualised Return = Return*(holding period/365)
=8.034*365/59
49.702%
2)
Purchase price of Stock= C$82.15, on 1st-May'18
exchange rate for the Canadian dollar is1.2940 on May 1
=82.15/1.294
USD $63.485
Sale price of Stock = C$88.75, on 29th-June'18
exchange rate for the Canadian dollar is 1.2268 on june 29
=88.75/1.2268
USD $72.342
Holding Period= 1st-may to 29th-June.= 59 days
Profit= 72.342-63.485 = USD $8.857
Return= (Profit/ Purchase price)*(holding period/365)*100
=(8.857/63.485)*100
13.951%
Annualised Return = Return*(holding period/365)
=13.951*365/59
86.307%
3)
Risk of the portfolio to change if the investor adds foreign investments to the portfolio in the following ways;-
Portfolio Diversification
Foreign portfolio investment gives investors an opportunity to engage in international diversification of portfolio assets, which in turn helps achieve a higher risk-adjusted return. The global stock market operates in such a way that the factors that drive the London Stock Exchange at any given time are different from those that prevail in Taiwan, for example. This means that an investor who has stocks in different countries will experience less volatility over the entire portfolio.
Benefit from Exchange Rate
International currency exchange rates keep changing. Sometimes the currency of the investor's home country may be strong, and sometimes it may be weak. There are times when a stronger currency in the foreign country where an investor has a portfolio may benefit the investor.
4. Ways a US investors can include foreign investments in their investment portfolios without the need to buy or sell investments in foreign securities markets.
a) Invest in ADRs
Investors that prefer a hands-on approach can easily purchase many individual foreign stocks using American Depository Receipts (ADRs), which are U.S.-traded securities that represent ownership in the shares of foreign companies. Since they are denominated in dollars and traded on the NYSE, NASDAQ or AMEX, ADRs do not require any complex currency conversion or foreign exchange transactions.
b) Investing in real estate in foreign Countries.
1)
Purchase price of Stock= C$82.15, on 1st-May'18
Sale price of Stock = C$88.75, on 29th-June'18
Holding Period= 1st-may to 29th-June.= 59 days
Profit= 88.75-82.15 = C$6.60
Return= (Profit/ Purchase price)*(holding period/365)*100
=(6.6/82.15)*100
8.034%
Annualised Return = Return*(holding period/365)
=8.034*365/59
49.702%
2)
Purchase price of Stock= C$82.15, on 1st-May'18
exchange rate for the Canadian dollar is1.2940 on May 1
=82.15/1.294
USD $63.485
Sale price of Stock = C$88.75, on 29th-June'18
exchange rate for the Canadian dollar is 1.2268 on june 29
=88.75/1.2268
USD $72.342
Holding Period= 1st-may to 29th-June.= 59 days
Profit= 72.342-63.485 = USD $8.857
Return= (Profit/ Purchase price)*(holding period/365)*100
=(8.857/63.485)*100
13.951%
Annualised Return = Return*(holding period/365)
=13.951*365/59
86.307%
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