Suppose you are a China-based investor who just sold Australian Commonwealth Ban

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 $60 per share. The exchange rate was Yuan4.50/$. You sold the stock for $65 per share and converted the dollar proceeds into Yuan at the exchange rate of 5.50Yuan/$.
A) Determine the percentage return from this investment in Australian dollars. Show all workings.   
B) Compute the rate of return on your investment in Yuan terms. Show all workings.
   C) What are channels that contribute to your investment risk? (Hint: Think about the variance of your investment)    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 $60 per share. The exchange rate was Yuan4.50/$. You sold the stock for $65 per share and converted the dollar proceeds into Yuan at the exchange rate of 5.50Yuan/$.
A) Determine the percentage return from this investment in Australian dollars. Show all workings.   
B) Compute the rate of return on your investment in Yuan terms. Show all workings.
   C) What are channels that contribute to your investment risk? (Hint: Think about the variance of your investment)    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 $60 per share. The exchange rate was Yuan4.50/$. You sold the stock for $65 per share and converted the dollar proceeds into Yuan at the exchange rate of 5.50Yuan/$.
A) Determine the percentage return from this investment in Australian dollars. Show all workings.   
B) Compute the rate of return on your investment in Yuan terms. Show all workings.
   C) What are channels that contribute to your investment risk? (Hint: Think about the variance of your investment)   

Explanation / Answer

Ans a)

Exchange Rate Yuan 4.5/AUD

China Based Innvestor had invested Yuan 446000 to buy shares of CBA

Now 1 share =AUD 60 =Yuan 60*4.5=Yuan 270

Then he must have bought 446000/270 shares =1651.85 shares

Therefore Valur of shares in AUD=1651.85*60=AUD 99,111

After 1 year share price was AUD 65 hence value of investment then will be 1651.85*65=AUD 107,370

Percentage return in AUD =(107370/99111)-1=8.333%

Ans b)

Now in Yuan Terms after a year innvestment will be AUD 107,370 that is in Yuan terms where Exchange rate then would be Yuan 5.5/AUD

Hence investment in Yuan terms is 107,370*5.5=Yuan 590535

Rate of return in Yuan will be (590535/446000)-1=32.40%

Ans C)

The only risk factor in this innvestment will be exchange rate risk which can be hedged by taking position in currency futures etc.

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