Joe Martinez, a U.S. citizen living in Brownsville, Texas, invested in the commo

Question

Joe Martinez, a U.S. citizen living in Brownsville, Texas, invested in the common stock of Telmex, a Mexican corporation.  he purchased 1,000 shares at 20.50 pesos per share.  Twelve months later, he sold them at 24.75 pesos per share.  He received no dividends during that time.

a. What was Joe's investment return (in percentage terms) for the year, on the basis of the peso value of the shares?

b. The exchange rate for pesos was 9.21 pesos per US $1.00 at the time of the purchase.  At the time of the sale, the exchange rate was 9.85 pesos per US $1.00. Transale the purchase and sale prices into US $.

c. Calculate Joe's investment return on the basis of the US $ value of the shares.

d. Explain why the two returns are different.  Which one is more important to Joe? Why??

***Help Please***

Explanation / Answer

A
Purchase price in pesos = 1000*20.50 = 20500
Sale price in pesos = 1000*24.75 = 24750
In pesos term return = (24750-20500)/20500 = 20.73%

B
Purchase price in dollar = 20500/9.21 = 2225.84
Sale price in dollar = 24750/9.85 = 2512.69

C
Investment Return in dollars = (2512.69 - 2225.84)/2225.84 = 12.89%

D
The difference in the two returns is due to change in exchanges rates at the time of purchase and sale transactions.
The return in dollar is important to Joe.
This is because being a US citizen he will translate all his incomes and expenditures in dollar and not pesos. He will be required to spend dollars for his dealings as pesos will be considered invalid in USA. And more over it is the home currency , it will be helpful for anlysing the actual return and the amount of investments that will be taxed.

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