Guys, I really get confused with Foreign currency appreciation and depreciation and end up in picking the wrong answer. Can somebody tell me where can I get good grounding of this in the Curriculum or Schweser note. Sample Q Which of the following statements is FALSE? A) An investor who purchases a foreign bond gains the most when both the asset and the foreign currency appreciate in value. B) The depreciation of foreign currency benefits domestic investors who buy foreign securities. C) Exchange-rate risk may benefit a bond investor. D) If the home currency appreciates against the foreign currency of the bond payments, each foreign currency unit will be worth less in terms of the home currency.
I think A. If both increase, they will still be at the same parity as before. No secret to these type of questions, one needs to keep practicing.
B
I’m thinking B: “The depreciation of foreign currency benefits domestic investors who buy foreign securities.” I’m no expert, but here’s my reasoning: If a foreign currency depreciates, the assets held in that country would have to be sold for the foreign currency, so selling the assets yields x amount of foreign currency. This is then sold and home currency is bought. If yesterday the spot rate 5 and today it’s 10, assuming the asset’s price hasn’t doubled, the investor loses some of the value of his investment.
Good call. saurya_s, looks like you’re not the only one with parity troubles ;-). I know what I’m going over after work.
Same logic is bugging me in put call, long short thing as well !! S
saurya_s Wrote: ------------------------------------------------------- > Which of the following statements is FALSE? > > A) An investor who purchases a foreign bond > gains the most when both the asset and the foreign > currency appreciate in value. > > > B) The depreciation of foreign currency > benefits domestic investors who buy foreign > securities. > > > C) Exchange-rate risk may benefit a bond > investor. > > > D) If the home currency appreciates against > the foreign currency of the bond payments, each > foreign currency unit will be worth less in terms > of the home currency. -------------------------------------------------------- saurya_s, where is this question from? the international economie part is removed from level 1 in 2008.
Schweser Q bank S