Question

Assume that you have invested $100,000 in Japanese equities. When purchased, the stock's price and the exchange rate were ¥100 and ¥100/$1.00 respectively. At selling time, one year after purchase, they were ¥110 and ¥110/$1.00. If the investor had sold ¥10,000,000 forward at the forward exchange rate of ¥105/$1.00 the dollar rate of return would be

Answer 1

The dollar rate of return on the investment can be calculated using the initial investment in dollars and the selling proceeds in dollars.

Step-by-step explanation:

To calculate the dollar rate of return, we need to determine the initial investment in dollars and the proceeds from the investment in dollars.

Initially, the stock was purchased at a price of ¥100 and the exchange rate was ¥100/$1.00. Therefore, the initial investment in dollars was $100,000 / ¥100 = $1,000

At the time of selling, the stock price and exchange rate were ¥110 and ¥110/$1.00 respectively. If ¥10,000,000 were sold forward at the forward exchange rate of ¥105/$1.00, the selling proceeds in dollars would be $10,000,000 / ¥105 = $95,238.10

The dollar rate of return can then be calculated as the percentage change in dollars between the initial investment and the selling proceeds:

Rate of Return = (Proceeds - Initial Investment) / Initial Investment × 100 = ($95,238.10 - $1,000) / $1,000 × 100 = 9423.81%

Answer 2

4.76%

Step-by-step explanation:

The computation of dollar rate of return is shown below:-

Initial investment in USD = 100,000

Converted to Japanese Yen at Yen 100 ÷ 1 USD = 10,000,000

Stock Price in Yen = 100

Number of shares purchased = 100,000

At year end sale price at 110 = 11,000,000

Out of this proceed, the investor will sold 10,000,000 Yen as per Forward contract at 105 Yen/USD and rest 1,000,000 at 110 Yen/USD

Dollar Proceed Equivalent USD

10,000,000 Yen at 105 Yen/USD 95,238

(10,000,000 ÷ 105)

1,000,000 Yen at 110 Yen/USD 9,091

(1,000,000 Yen ÷ 110)

Dollar proceed 104,329

Return as a Percentage = ((Sale value - Purchase value) ÷ Purchase value) × 100

= (($95,238 - $90,909) ÷ $90,909) × 100

= $4,329 ÷ $90,909 × 100

= 4.76%