In the previous post, we had three percentages to start with for the cross-border investor 1) Absolute rate of return in local currency 2) Currency appreciation/depreciation rate 3) Inflation rate. And, we compared how to assess performance.
In this post, we have access to the exact and absolute values for currency exchange rates, instead of the just the appreciation/depreciation rates.
So, in the first method, we calculate the rate of return when you have absolute values . We also validate in the second method, using the Formulae 1 and 2 from the previous post.
In this example, Let's consider that Ms. Uma Sheldon (USA based investor - henceforth Ms.US) purchased an asset for 120 INR (when 1 USD = 40 INR) and sold at 300 INR (when 1 USD = 60 INR)
Method 1 - Using Absolute values for currency exchange rates
To calculate her currency-adjusted returns in USD:
Purchase price = 120/40 = 3 USD
Sale price = 300/60 = 5 USD
Hence the rate of return for Ms.US in dollar terms = (5-3)/3 = 66.67%
Method 2 - Validation using the formula from previous post.
Now, let's validate the same using Formula 1 and Formula 2 from the previous post.
Formula 1) Rate of Return (Nominal Rate of return)
In INR terms, the rate of return is (300-120)/120 = 150%
The currency depreciated from 40 to 60 in this period.
Let's calculate that percentage decrease.
1 INR, at the time of purchase would have procured 1/40 USD.
At the time of sale, 1 INR would have procured 1/60 USD.
So, the rate of depreciation is
(1/60 - 1/40) / (1/40) = -33.33%
In this post, we have access to the exact and absolute values for currency exchange rates, instead of the just the appreciation/depreciation rates.
So, in the first method, we calculate the rate of return when you have absolute values . We also validate in the second method, using the Formulae 1 and 2 from the previous post.
In this example, Let's consider that Ms. Uma Sheldon (USA based investor - henceforth Ms.US) purchased an asset for 120 INR (when 1 USD = 40 INR) and sold at 300 INR (when 1 USD = 60 INR)
Method 1 - Using Absolute values for currency exchange rates
To calculate her currency-adjusted returns in USD:
Purchase price = 120/40 = 3 USD
Sale price = 300/60 = 5 USD
Hence the rate of return for Ms.US in dollar terms = (5-3)/3 = 66.67%
Method 2 - Validation using the formula from previous post.
Formula 1) Rate of Return (Nominal Rate of return)
In INR terms, the rate of return is (300-120)/120 = 150%
Formula 2) Currency Conversions
The currency depreciated from 40 to 60 in this period.
Let's calculate that percentage decrease.
1 INR, at the time of purchase would have procured 1/40 USD.
At the time of sale, 1 INR would have procured 1/60 USD.
So, the rate of depreciation is
(1/60 - 1/40) / (1/40) = -33.33%
So, using this for the currency appreciation rate in Formula 2 from the previous post:
[(1+nominal rate) * (1+currency appreciation rate) ] - 1
[ (1+150%) * (1-33.33%) ] - 1 = 66.67%
This is the same result as you had in Method 1.
After arriving at this number using either Method, you can continue with the inflation-adjusted real rate of return using Formula 3 from the previous post.
