Suppose you are a euro-based investor who simply sold Microsoft shares which you had bought six months ago. You had invested 10,000 euros to buy Microsoft shares for $120 each share; the exchange rate was $1.15 each euro. You sold the stock for $135 each share and converted the dollar carries on into euro at the exchange rate of $1.06 per euro. First, calculate the profit from this investment in euro terms. Second, compute the rate of return on your investment in euro terms. Determine How much of the return is payable to the exchange rate movement?

Solution: It is helpful first to calculate the rate of return in euro terms:

This points out that this euro-based investor benefited from an appreciation of dollar against the euro, also from an appreciation of the dollar value of Microsoft shares. The profit in euro terms is approximately C2,100, and the rate of return is about 21% in euro terms, of which 8.5% is due to the exchange rate movement.