Final answer:
Starting with 20,000 British pounds, an investor converts to $30,000 U.S dollars at a $1.50 exchange rate. After the rate falls to $1.25, reconverting $30,000 would yield 24,000 British pounds. This demonstrates how portfolio investment is tied to exchange rate expectations.
Step-by-step explanation:
In this scenario, the international investor initially converts 20,000 British pounds into $30,000 U.S. dollars at an exchange rate of $1.50 per pound. Consequently, the investor holds $30,000 when the exchange rate subsequently drops to $1.25 per pound. If the investor decides to convert the $30,000 back into British pounds at the new rate, the calculation would be $30,000 divided by $1.25 per pound, resulting in 24,000 British pounds.
This exchange rate fluctuation exemplifies the potential impact on returns in international investing. In this case, the investor benefits from the depreciation of the British pound against the U.S. dollar, as the amount of British pounds obtained upon reconversion increases due to the more favorable exchange rate.
Portfolio investment frequently involves strategic decisions based on expectations of currency movements. Investors may aim to capitalize on exchange rate fluctuations, attempting to buy low and sell high to maximize returns. However, the unpredictability of exchange rates introduces inherent risks. Fluctuations can be influenced by a myriad of factors, including economic indicators, geopolitical events, and market sentiment, making accurate predictions challenging.
While this investor benefits from the currency depreciation in this specific scenario, it underscores the speculative nature of currency trading within a portfolio. Investors need to carefully consider the risks associated with exchange rate movements, as incorrect predictions can lead to financial losses. Diversification, risk management strategies, and staying informed about global economic conditions are essential components of navigating the complexities of international portfolio investments.