Michael J. Riley
What does it matter that one invests, borrows, sells, or buys in foreign countries? Isn’t it all the same?
Look at the following four case studies and two theories that can be at least a little helpful, and you will likely answer that this is understandable but risky. We start with a personal example, because many people can relate to complex subjects more easily on a personal level. The remaining examples are taken from real corporate situations and modified to disguise the companies.
Currency Exchange Rates: A Case of Individual Investing
Let’s start with an example created to make a point. In May 2008, Rodney decided that rates on U.S. certificates of deposit (CDs) were too low and the time was right to invest in a bank in England. He expected to earn 4% on his money in six months (8% annually) and ended up with a loss. He discussed what went wrong with his dad.
Rodney: I can’t understand what went wrong. I lost money and I thought it was a sure thing. I invested $10,000 in a six-month CD on May 31, 2008, that promised a 4% return.
Dad: The promised return of 4% for six months works out to be 8% per year. That was far above what CDs paid in the United States. Didn’t you get the interest promised?
Rodney: I don’t think so. My IRA statement said that my investment earned £202.45, which is 4%. Yet my statement also said that my account was worth only $8,087.95 on December 1, 2008. If that is true, what happened to the interest? How could ...