Joe Martinez, a U.S. citizen living in Brownsville, Texas, invested in the common stock of Telmex, a Mexican corporation. He purchase 1,000 shares at 20.50 pesos per share. Twelve months later, he sold them at 24.75 pesos per share. He received no dividends during that time.
a. What was Joe’s investment return (in percentage terms) for the year, on the basis of the peso value of the shares?
b. The exchange rate for pesos was 9.21 pesos per US$1.00 at the time of the purchase. At the time of the sale, the exchange rate was 9.85 pesos per US$1.00. Translate the purchase and sale prices into US$.
c. Calculate Joe’s investment return on the basis of the US$ value of the shares.
d. Explain why the two returns are different. Which one is more important to Joe? Why?