This question is designed to show your understanding of stock market terminology and also the impact of currency exchange rate. You are a Swiss Franc (CHF) based investor.
You invest in a stock denominated in EUR in an amount of EUR 20,000 (twenty thousand euros). You hold the stock for one year. At the end this time you receive dividend; the dividend yield based on the purchase price is 4%. In addition the price earnings ratio increases from 12 to 15, while the EPS improve by 5%.You decide to take profits after one year. What price do you receive in euros ? (Ignore transaction costs like brokerage fees.)
What annual return have you received in EUR?
When you bought the stock there were CHF 1.50 to EUR 1.
When you sell, however, the EUR has fallen to CHF 1.30
Now what is your return in CHF ?
You were aware if the risk of the EUR falling against CHF.
When you bought the stock you also bought a put option on EUR
With a strike price of CHF 1.4 to the EUR.
The option cost you CHF 1,000.
What is now your return in CHF ?
The question belongs to Finance and it discusses about calculation of annual return for a stock in Euros and Swiss Franc.
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