Portfolio Mngmt Q exchange, investor, return

JonnyKay

Japan investor invests in UK bond, bond return: 5% per year
Spot exchange rate at beg: 200 Yen/pound
spot exchange rate at end: 190
What is the ex post return from Japan investor’s perspective:
post answer later.

xilinx_altera

I GUESS 5% + (190-200)/(200) = 0%

JRossSter

i did the same thing.
answer is -0.25%
5%+(-0.05)x(1+0.05%)=-0.25%
I have no clue why they did it this way.

kseniaru

You invest your money ($1.00) abroad in GBP. You earn Rf of 5% in GBP. You have $1.05 pounds after. You convert it back at a lower price. You are buying back Yen at 190 per GBP and not 200 per GBP.
Therefore the total return will be 1. GBP % bond * 2. JPY decline in currency %.
1. (1 + 0.05) * (1 + (190-200)/200)= (1.05) * (0.95) = 0.9975.
subtract 1 - 0.9975 = 0.0025% your return.

Carson

makes sense. except -0.25%.
when do we use linear approximation and when do we do it like this?
so inconsistent

luckygiftvn

Here is my take
Jap guy sells Y200 to get GBP1
Invest GBP 1 for a year @ 5% to get GBP 1.05
Sell GBP 1.05 at year end spot rate to get 1.05*190 = Y199.5
Your return is Y199.5/Y200-1 = -0.25%
prophets has the same answer but the owrong order
Yo essential started with with 1GBP and end up with GBP 0.9975
so 0.9975 -1 = -.25%
I prefer the logical route so I never get confused, its the same principal for all currency concepts
Fwd, Future, Swaps, Eco and PM

Siddimaula

Convert 200 JPY to Pounds at 200 JPY/P = 1P
invest at 5% for the period. Ending value = 1.05
Convert back at 190 JPY/P = 1.05*190 = 199.5
Return = 199.5/200 - 1 = -0.0025 = -0.25%