Assume you are a euro-based investor who just sold Microsoft shares which you had bought six months ago. You had invested 10,000 euros to purchase Microsoft shares for $120 per share; the exchange rate was $1.15 per euro. You sold the stock for $135 per share and altered the dollar proceeds into euro onto the exchange rate of $1.06 per euro. Firstly, determine the profit from this investment in euro terms. Secondly, calculate the rate of return on your investment in euro terms. How much of the return is because of the exchange rate movement?
It is useful first to calculate the rate of return in euro terms:
It indicates that this euro-based investor benefited through an appreciation of dollar against the euro, plus from an appreciation of the dollar value of Microsoft shares. The profit in euro terms is approximate C2,100, and the rate of return is approximate 21% in euro terms, of which 8.5% is because of the exchange rate movement.