A Peruvian investor buys 140 shares of a U.S. stock for $6,440 ($46 per share).

Question

A Peruvian investor buys 140 shares of a U.S. stock for $6,440 ($46 per share). Over the course of a year, the stock goes up by $7 per share.

a. If there is a 10 percent gain in the value of the dollar versus the Peruvian nuevo sol, what will be the total percentage return to the Peruvian investor?

b. Now assume that the stock increases by $8, but that the dollar decreases by 10 percent versus the Peruvian nuevo sol. What will be the total percentage return to the Peruvian investor? Use .90 in place of 1.10 in this case. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

Explanation / Answer

a. Initial investment = 140* 46 = USD 6440

Closing value of investment at the end of the year = 140* 53 = 7420 USD at the original exchange rate.

Assuming that the value of USD vs PEN = $1 at the beginning. This has changed to $1.1 at the end which implies that there is an exchange rate gain also.

Hence closing value of investment at the end of year = 7420*1.1 = 8162

Total return = (8162-6440)/ 6440 = 26.74%

b.

Initial investment = 140* 46 = USD 6440

Closing value of investment at the end of the year = 140* 54 = 7560 USD at the original exchange rate.

Assuming that the value of USD vs PEN = $1 at the beginning. This has changed to $0.9 at the end which implies that there is an exchange rate loss also.

Hence closing value of investment at the end of year = 7560*0.90 = 6804

Total return = (6804-6440)/ 6440 = 5.65%

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