- Guten Investments GmbH, based in Germany and using the EUR as its reporting
currency, is an asset management firm providing investment services for local high
net worth and institutional investors seeking international exposures. The firm invests
in the Swiss, UK, and US markets, after conducting fundamental research in order
to select individual investments. Exhibit 1 presents recent information for exchange
rates in these foreign markets.
Based on Exhibit 1, the domestic- currency return over the last year (measured
in EUR terms) was higher than the foreign- currency return for:
Solution: C
The Euro- Swiss (CHF/EUR) is the only spot rate with a negative change (from
1.2175 to 1.2080), meaning the EUR depreciated against the CHF (the CHF/
EUR rate decreased). Or put differently, the CHF appreciated against the EUR,
adding to the EUR- denominated return for the German investor holding CHFdenominated assets.
Both the Euro- dollar (USD/EUR) and Eurosterling (GBP/EUR) experienced a positive change in the spot rate, meaning the EUR appreciated against these two currencies (the USD/EUR rate and the
GBP/EUR rate both increased). This would result in a lower domestic- currency
return for the German investor relative to the foreign- currency return
for the USD- and GBP- denominated assets.
So, basically, your EUR appreciated, but USD and GBP depreciated.
You have a lower domestic-currency return on your foreign assets, because those decreased?
- Marina Campos is a senior portfolio manager for Sabanai Investimentos in Sao Paulo, Brazil. Sabanai provides investment management and advisory services for high-net-worth and institutional clients. She is assisted by two portfolio analysts, Fabiana Traldi and Pedro Peixaria. Campos is meeting with Traldi and Peixaria to discuss the portfolios of three clients.
The first client is Gilvan Araujo Dias, a high-net-worth client who has given Sabanai responsibility for managing his foreign investments, which consist of equity investments in the United Kingdom and Germany. His other assets consist of equity and corporate bond investments in Brazil. Exhibit 1 summarizes information on Dias’s foreign portfolio holdings and exchange rates.
Based on the information provided in Exhibit 1, the domestic currency value of Dias’s foreign investments most likely:
A. decreased because of changes in the domestic currency value of foreign asset holdings.
B. increased because of changes in the domestic currency value of UK assets but decreased because of changes in the domestic currency value of German assets.
C. increased because of changes in the domestic currency value of foreign asset holdings.
Solution
C is correct. The domestic currency value of Dias’s portfolio of foreign assets most likely increased because of changes in the domestic currency value of foreign asset holdings.
And here - the same logic: BRL depreciated, but the currencies of the foreign assets (GBP and EUR increased). Meaning that for you, as a Brazilian investor, having BRL as domestic currency, the domestic currency value actually increased, because the value of the investments in that portfolio increased…
Is my rationing correct under the 2 cases?
Thanks!