Accounts & Finance

"(a) The initial investment in euros was:

10,000 euros = 10,000 x 1.15 = $11,500

The proceeds from selling the shares in dollars were:

$135 x 100 = $13,500

Converting the proceeds into euros at the exchange rate of $1.06 per euro:

$13,500 ÷ 1.06 = 12,735.85 euros

The profit in euro terms was:

12,735.85 euros - 10,000 euros = 2,735.85 euros

(b) The rate of return on the investment is:

(Proceeds in euros - Initial investment in euros) ÷ Initial investment in euros x 100%

(12,735.85 euros - 10,000 euros) ÷ 10,000 euros x 100% = 27.36%

The exchange rate movement contributed to the return because the euro strengthened relative to the dollar over the six-month period. The dollar price of Microsoft shares increased from $120 to $135, which represents a 12.5% increase. However, the euro also strengthened from $1.15 per euro to $1.06 per euro, which represents a 7.83% increase. Therefore, the exchange rate movement contributed about 62.6% (7.83%/12.5%) of the total return of 27.36%."