[nalratoss]

I have problems recognizing the direction of exchange to consider, here is a question:

A company considers investing $20 million in a foreign company whose local currency is under pressure. The company suspects that the exchange rate may fluctuate soon. The exchange rate at the time of the investment is 2.57 to $1.00. After the investment, the exchange rate changes to 3.15 to $1.00. What is the change in the value of the company’s investment in U.S. dollars?

A. 22.6% increase.
B. 18.4% decrease.
C. 18.4% increase.
D. 22.6% decrease.

I picked A. I thought that before the investment, a dollar worth 2.57 of foreign currency, now the dollar worth 3.15. So the investment in US dollars is worth more than before, right?

Nope, answer indicates I forgot to invert the exchange rate. It is measured in foreign currency.

Why? The last sentence asked the value of investment in US dollars?

P.S Seems that the forum posting’s “remind me of replies through email” option is disabled. Actually I don’t mind having this function, or at least the option of choosing.

FAR-80

AUD-77

REG-75

BEC-82

 

I'm done done!

[Anonymous]

Think of it this way it used to take 2.57 of foreign currency to buy $1, now it takes more-therefore the foreign currency decreased. Hope this helps!

[Anonymous]

My 2cents:
You invest 20 mln @ 2.57, i.e. 51.4 mln in local currency. After the change of x rate, the value in USD is 51.4 mln / 3.15 = 16.317 mln USD. The decrease is 3.683 mln USD, or 18.41%.

[Q]

Hi,

My answer is 18.41%

Always remember to convert foreign currency to dollar rate.

Old rate 1/2.57 = $.389105
New rate 1/3.15 = $.317460

Calculate:
inflation rate = change / base
= 0.071646 / 0.389105
= 18.4%

[Author]

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