Currency return on foreign investments difference, Investment, different, only

Muddahudda

I'm confused by the formula for finding the domestic return on a foreign asset. When do we use the two different formulas? The only difference is the "1" in the last part of the equation:

a.) Domestic return = Return in Lc + Return FX + (Return FX * Return in LC)
b.) Domestic return = Return in Lc + Return FX + [(Return FX)*(1 + Return Lc)]

Example to show how the two formulas in the curriculum create different answers:

Investment returns +10% in Local terms during period
FX appreciates by 5%
What is the return in domestic returns on the foreign investment?

Answers:

Using formula a.) .10 + .05 + (.05*.10) = 15.5%
Using formula b.) .10 + .05 + [(.05)*(1+.10)] = 20.50%

Can anyone clear up when we would use the "1" in the last part of the equation, and when we wouldn't use it? I've seen both of these used and am not sure when one is more appropriate than the other.

Windjam

formula a is what is used and over a period of time the cross product approaches zero.

can you give an example of formula b being used in the book .. what section

former

Formula b should look like this:

Domestic return = Return in Lc + [(Return FX)*(1 + Return Lc)]


That's the Stalla version.

NO EXCUSES

Analyze_This

Oh so formula a is correct and can be used at all times for this kind quesiton?

justin88

Formula A is correct, and just an algebraic expansion B (but your B version has extra term, use the one from bpdulog's post

Just stick with A