Suppose you are a China-based investor who just sold Australian Commonwealth Ban
ID: 1160247 • Letter: S
Question
Suppose you are a China-based investor who just sold Australian Commonwealth Bank (CBA) shares that you had bought six months ago. You had invested Yuan446,000 to buy CBA shares for $60 per share. The exchange rate was Yuan4.50/S. You sold the stock for $65 per share and converted the dollar proceeds into Yuan at the exchange rate of 5.50Yuan/$. 4J A) Determine the percentage return from this investment in Australian dollars. Show (4 marks) all workings B) Compute the rate of return on your investment in Yuan terms. Show all workings. (6 marks) C) What are channels that contribute to your investment risk? (Hint: Think about the variance of your investment) 5 marks) wExplanation / Answer
Solution: Investment : 446,000 Yuans. Exchange rate = 4.50Yuan/$ (i.e, 1$ = 4.50Yuans)
So in dollar terms, investment = 446,000/4.50 = $99,111.11$.
Cost of 1 share =$60, then cost of x shares = $99,111.11. Finding x (no. of shares bought) = 99111.11/60 = 1651.852 (approx)
So, I had bought 1651.852 shares (keeping in fraction, for accuracy of application). I sold this stock for $65/share.
So, in dollar terms I earned 1651.852*65 = $107,370.38. With exchange rate of 5.50 Yuans/$, in terms of Yuans, I earned 107370.38*5.50 = 590,537.09 Yuans by selling those shares.
Return on Investment, ROI = (Net profit/investment)*100
a) In terms of Australian dollars, ROI = (($107,370.38 - $99,111.11)/$99,111.11)*100
= 8259.27*100 / 99111.11 = 8.33%
(Most workings shown in introductory part of the solution)
b) In terms of Chinese yuans, ROI = ((590,537.09Yuans - 446,000Yuans)/446,000Yuans)*100
= 144537.09*100 / 446000 = 32.407%
(Most workings shown in introductory part of the solution)
c) Mainly, the investment risk (variation in investment) arise as a result of:
1) Market fluctuations: Shares is a risky thing to invest in. There is uncertainity in which direction the markets might works, whether boom (positive returns) or recession (not so positive, negative returns), or are we dealing in a bull market or a bear market. So, this is a major point causing investment risk.
2) Exchange rate fluctuations: While investing in foreign investments, one is also prone to exchange rate fluctuations. In our example above, the Chinese Yuan currency became weaker against the Australian dollars, thus investment in Australian shares was beneficial for the Chinese owner, giving him good returns. Flexible exchange rate depends on the world economy, their demand and supply, and hence is variant to world market conditions, thereby causing risk of foreign investments.