Question

An investor starts with €1 million and converts it to £694,500, which is then invested for one year. In a year the investor has £736,170, which she then converts back to euros at an exchange rate of 0.68 pounds per euro. The annual euro rate of return earned was _____.

Answer 1

Answer:

8.26% per annum

Explanation:

Amount received in euros upon conversion at 1 year forward rate:

= 736170 pounds/0.68 pound = 10,82,603 euros

Amount of money invested at the beginning = 10,00,000 euros

Return earned over a period of 1 year = 1082603 - 10,00,000 euros

                                                               = 82,603 euros

Returned earned = 82603/1000000 × 100 = 8.26 % per annum

Forwards rate is referred to as the exchange rate between two currencies at a future date.

Spot rate refers to the exchange rate prevailing between two currencies as on today.