Excercise 11 The world financial markets experienced a rather turbulent last yea

Question

Excercise 11 The world financial markets experienced a rather turbulent last year. Six month ago, the Dow-Jones-lndex was at 13,600 points, today it is at 16,912 points. The stock markets across the Atlantic Ocean had a similar development. From 9,598 points six month ago, the German stock market index DAX rose to 10,798 points*. On the other hand during the same period the value of the Euro changed from 1.3439 Dollar per Euro to 1.1250 Dollar per Euro. a) Calculate the yield of an American and a German investor, investing in their home market. investor, investing in the foreign market. Dollar-exchange rate? b) Calculate the yield of an American and a German c) Who did benefit from the development of the Euro-

Explanation / Answer

Ans A)

Yield of an American investor will be (16912/13600)^0.5-1=11.51%

Yield of an German INvestor will be (10798/9598)^0.5-1=6.067%

Ans B)

IF AMerican investor hs invested in German Stocks and German investor has done it in American stocks

At first Aerican would have converted dollars into Euro therefore lets say to convert X USD into Euro he gets X/1.3439 EURO and after 6 months we have X/1.3439*(1.1151)*1.1250 USD.=0.9339 X USD

Hence American Investor has faced loss of (X-0.9339X)=0.0661X in this transaction

Now with the similar logic if German investor invests in Dow Jones for 6 months and then converts into Euro after 6 months we have

1.3439X(1-06066)/1.1250=1.2675X

Hence German INvestor has earned positive payoff of 26.75%

Therefore we can day that Not American but German Investor has benefited from this trahsaction

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