Response to the following problem:
Identify and briefly describe the three sources of return to Australian investors in foreign shares. How important are currency exchange rates? With regard to currency exchange rates, when is the best time to be in foreign securities?
Listed below are exchange rates (for the beginning and end of a hypothetical one-year investment horizon) for three currencies: the British pound (B£), New Zealand dollar (NZ$) and Mexican peso (Mp).
Currency Exchange Rates at
Currency Beginning of Investment Horizon End of One-Year Investment Horizon
British pound (B£) 1.55 A$ per B£ 1.75 A$ per B£
New Zealand dollar (NZ$) 1.35 NZ$ per A$ 1.25 NZ$ per A$
Mexican peso (Mp) 0.10 A$ per Mp 0.08 A$ per Mp
From the perspective of an Australian investor holding a foreign (British, New Zealand or Mexican) share, which of the above changes in currency exchange rates would have a positive effect on returns (in Australian dollars)? Which would have a negative effect?