An investor based in Eurozone has invested in stocks in Australia. What pattern of the foreign exchange rates would be beneficial to his investment if he plans to use his earnings in euros?Klausimas 10AtsakymasStrengthening of Australian dollar versus EuroStrengthening of Australian dollar versus US dollarNo change in the exchange rate of Euro and Australian dollarStrengthening of US dollar versus Euro
Question
An investor based in Eurozone has invested in stocks in Australia. What pattern of the foreign exchange rates would be beneficial to his investment if he plans to use his earnings in euros?Klausimas 10AtsakymasStrengthening of Australian dollar versus EuroStrengthening of Australian dollar versus US dollarNo change in the exchange rate of Euro and Australian dollarStrengthening of US dollar versus Euro
Solution
The investor would benefit from the strengthening of the Australian dollar versus the Euro. This is because when the investor decides to convert his earnings from Australian dollars back to Euros, he will get more Euros for each Australian dollar. This is due to the increased value of the Australian dollar relative to the Euro.
The other options would not be as beneficial. If the Australian dollar strengthens against the US dollar, it doesn't directly affect the investor unless he plans to convert his earnings to US dollars. No change in the exchange rate of Euro and Australian dollar means the investor's earnings in Euros would remain the same. Lastly, the strengthening of the US dollar versus the Euro would be disadvantageous if the investor plans to convert his earnings to US dollars before converting to Euros, as he would get fewer Euros for each US dollar.
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