Problem: In March 2004, an American investor buys 1,000 shares in a Mexican company at a price of 500 pesos each. The share does not pay any dividend. A year later she sells the shares for 550 pesos each. The exchange rates when she buys the stock are shown in table:
Suppose that the exchange rate at the time of sale is peso $12.0/$.
a. How many dollars does she invest?
b. What is her total return in pesos? In dollars?
c. Do you think that she has made an exchange rate profit or loss? Explain.
Fig: Spot and forward exchange rates, March 22, 2004.
* Rates show the number of units of foreign currency per U.S. dollar, except for the euro and the U.K. pound, which show the number of U.S. dollars per unit of foreign currency.
Source: Financial Times, March 23, 2004.
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Spot Rate*
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Forward Rate
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1 Month
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3 Months
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1 Year
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Europe:
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EMU (euro)
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1.2375
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1.2364
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1.2346
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1.2285
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Norway (krone)
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6.8168
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6.8217
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6.8292
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6.8610
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Sweden (krona)
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7.4509
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7.4601
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7.4738
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7.5284
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Switzerland (franc)
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1.2559
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1.2549
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1.2532
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1.2451
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United Kingdom (pound)
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1.8472
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1.8421
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1.8325
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1.7877
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Americas:
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Canada (dollar)
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1.3276
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1.3289
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1.3311
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1.3388
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Mexico (peso)
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10.9815
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11.0338
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11.1260
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11.5775
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Pacific/Africa:
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Hong Kong (dollar)
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7.7928
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7.7858
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7.7740
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7.7390
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Japan (yen)
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106.83
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106.72
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106.53
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105.505
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South Africa (rand)
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6.4662
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6.5107
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6.5917
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6.9812
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South Korea (won)
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1160.5
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1163.8
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1169.2
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1186.0
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