Answer:
(a) ii Depreciate
(b) 84.03 Euro
(c) 123.03 Euro
(d) 161.17 USD
(e) 61.17%
(f) 15.29%
Explanation:
(a) The value of USD is depreciating as you can exchange 1.19 USD for 1 Euro but in after four years, you will need 1.31 USD to exchange for 1 Euro. Thus, you will need more dollars for 1 Euro.
(b) To convert USD to Euro, we just divide the USD with the exchange rate,
Euro = 100 / 1.19 ⇒ 84.0336 Euro
(c) We simply use the compound interest rate formula to calculate the value of our investment after four years with compounding interest,
The formula for compound interest rate is,
A = P(1 + r/n)^nt
Where,
A = Final amount of investment
P = Initial principal Invested
r = interest rate
n = number of times interest is compounded per time period
t = number of time periods
- A = 84.03 ( 1 + 0.1/1)^4 ⇒ 123.028323 Euro
(d) We convert the euros back to USD using the after 4 year exchange rate of 1 Euro to 1.31 USD,
- 123.03 * 1.31 ⇒ 161.17 USD
(e) Total Return in USD = (161.17 - 100) / 100 ⇒ 0.6117 or 61.17 %
(f) The annual average return can be calculated by dividing the total return by the number of years = 61.17% / 4 = 15.2925 %
