Approximation Formula for Foreign Investment Return in Home Currency

Expected Rate of Foreign Currency Depreciation (δ^E)

An investor from the United States purchases a one-year government bond from Brazil, which pays interest in Brazilian real. Over the course of the year, the rate of depreciation of the Brazilian real relative to the US dollar is 4%. When the bond matures and the investor converts the principal and interest back into US dollars, how will this change in currency value have affected the investor's total return in US dollars?

Calculating Investment Returns with Currency Depreciation

A U.S. investor is comparing two one-year foreign government bonds. Bond A, issued in Country A's currency, offers a 5% annual interest rate. Bond B, issued in Country B's currency, offers a 7% annual interest rate. The investor notes that the currency of Country A is depreciating against the U.S. dollar at a rate of 1% per year, while the currency of Country B is depreciating at a rate of 5% per year. Assuming all other factors are equal, which statement best describes the situation from the U.S. investor's perspective?

Calculating Currency Depreciation

Evaluating International Investment Opportunities

An investor from Canada purchases a one-year bond denominated in Mexican pesos. If the Mexican peso depreciates against the Canadian dollar over the course of the year, this will increase the total return for the investor when they convert their proceeds back into Canadian dollars.

For an investor holding a foreign asset, a higher rate of depreciation of the foreign currency relative to the investor's home currency will ______ the total return when the investment proceeds are converted back to the home currency.

An investor based in a home country is holding assets denominated in a foreign currency. Match each exchange rate scenario with its most likely impact on the investor's total return when the foreign currency is converted back to the home currency.

Analyzing Investment Performance Discrepancy

An investor from Japan holds an asset denominated in U.S. dollars. At the beginning of the investment period, the exchange rate is 150 Japanese yen per U.S. dollar. At the end of the period, the exchange rate is 142.5 Japanese yen per U.S. dollar. What was the rate of depreciation of the foreign currency (U.S. dollar) relative to the investor's home currency (Japanese yen) during this period?