How does a strengthening currency affect foreign investors?

How does a strengthening currency affect foreign investors?

• A. It increases the value of returns for foreign investors.
• B. It reduces the potential returns for foreign investors.
• C. It has no impact on investor returns.
• D. It forces foreign investors to reinvest domestically.

Answer: (A)

When a currency strengthens, the cash flows foreign investors receive in that currency become more valuable when converted to their own, or home, currency. This happens because fewer units of the home currency are needed to buy one unit of the stronger domestic currency. So profits earned in the domestic currency translate into a larger amount in the investor’s currency, increasing the reported value of returns. For example, if an investor earns 100 units of the domestic currency and that currency strengthens, those 100 units convert into more of the investor’s home currency than before. This is why the strengthening currency boosts foreign investors’ returns when profits are repatriated. It doesn’t force reinvestment domestically, nor does it imply no impact; it mainly affects returns once they’re converted.

When a currency strengthens, the cash flows foreign investors receive in that currency become more valuable when converted to their own, or home, currency. This happens because fewer units of the home currency are needed to buy one unit of the stronger domestic currency. So profits earned in the domestic currency translate into a larger amount in the investor’s currency, increasing the reported value of returns. For example, if an investor earns 100 units of the domestic currency and that currency strengthens, those 100 units convert into more of the investor’s home currency than before. This is why the strengthening currency boosts foreign investors’ returns when profits are repatriated. It doesn’t force reinvestment domestically, nor does it imply no impact; it mainly affects returns once they’re converted.