180) How Foreign Exchange Impact Your Foreign Investments 

How to calculate Foreign Investments Return in the local RM currency.

Foreign Exchange

Eg. USD1.00 = RM4.00

USD1000 equivalent to RM4000.

RM exchange against foreign currency.

RM Weaken means:
USD1 = RM4.50 (increased from RM4.00)
USD1000 = RM4500.

You just made RM500 extra.

RM Strengthen means:
USD1 = RM3.50 (reduced from RM4.00)
USD1000 = RM3500.
You just loss RM500.

 
(1+Total Return) = (1+Foreign Exchange Change Rate) x (1+Stock Price Change Rate)

Using simple symbol,
(1+TR) = (1+FR)(1+SR)

Example 1: Stock Price Increased, Foreign Exchange Remains Same.
Initial:
Stock Price: $5.00
 
Current:
Stock Price: $6.00 (increased)
 
Change Rate, SR = (6.00-5.00)/5.00
SR = 20%

Using the Formula,
Foreign Exchange Change Rate, FR = 0% (no change)
Stock Price Change Rate, SR = 20% (increased)
 
(1+TR) = (1+FR)(1+SR)
(1+TR) = (1+0%)(1+20%)
(1+TR) = (1+20%)
TR = 20% (gain)

Example 2: Stock Price Remains Same, Foreign Exchange Weaken
Initial:
RM to USD: RM4.00
 
Current:
RM to USD:RM4.50 (weaken)
 
Foreign Exchange Rate, FR = (4.50-4.00)/4.00
FR = 12.5%

Using the Formula,
Foreign Exchange Change Rate, FR = 12.5% (weaken)
Stock Price Change Rate, SR = 0% (no change)

(1+TR) = (1+FR)(1+SR)
(1+TR) = (1+12.5%)(1+0%)
(1+TR) = (1+12.5%)
TR = 12.5% (gain)

Example 3:  Stock Price Increased, Foreign Exchange Weaken.  

Initial:
RM to USD: RM4.00
Stock Price: $5.00

Current:
RM to USD:RM4.50 (weaken) 
Stock Price: $6.00
 
Foreign Exchange Rate, FR = (4.50-4.00)/4.00
FR= 12.5%


Share Price Change Rate, SR = (6.00-5.00)/5.00
SR = 20%

Using the Formula,
Foreign Exchange Change Rate, FR = 12.5% (weaken)
Stock Price Change Rate, SR = 20% (increased)

(1+TR) = (1+FR)(1+SR)
(1+TR) = (1+12.5%)(1+20%)
(1+TR) = (1.125)(1.20)
(1+TR) = (1.35)
TR = 35% (gain)

When the Foreign Exchange to RM weakens and Stock Prices Increase, you will have double positive returns from both factors.

Example 4:  Stock Price Reduced, Foreign Exchange Strengthen.  

Initial:
RM to USD: RM4.00
Stock Price: $5.00

Current:
RM to USD:RM3.50 (strengthen) 
Stock Price: $4.00 (reduced)
 
Foreign Exchange Rate, FR = (3.50-4.00)/4.00
FR= -12.5%


Share Price Change Rate, SR = (4.00-5.00)/5.00
SR = -20%

Using the Formula,
Foreign Exchange Change Rate, FR = -12.5% (strengthen)
Stock Price Change Rate, SR = -20% (reduced)

(1+TR) = (1+FR)(1+SR)
(1+TR) = (1-12.5%)(1-20%)
(1+TR) = (0.875)(0.80)
(1+TR) = (0.70)
TR = -30% (loss)

When the Foreign Exchange to RM strengthens and Stock Prices reduce, you will have double negative returns from both factors.

Example 5:  Stock Price Reduced, Foreign Exchange Weaken.  

Initial:
RM to USD: RM4.00
Stock Price: $5.00

Current:
RM to USD:RM4.50 (weaken) 
Stock Price: $4.00
 
Foreign Exchange Rate, FR = (4.50-4.00)/4.00
FR= 12.5%


Share Price Change Rate, SR = (4.00-5.00)/5.00
SR = -20%

Using the Formula,
Foreign Exchange Change Rate, FR = 12.5% (weaken)
Stock Price Change Rate, SR = -20% (reduced)

(1+TR) = (1+FR)(1+SR)
(1+TR) = (1+12.5%)(1-20%)
(1+TR) = (1.125)(0.80)
(1+TR) = (0.90)
TR = -10% (loss)
 
The Foreign Exchange Rate Weaken giving a positive return, but the Stock Price decreased giving a negative return. Depending on which effect is more, the Total Return may be positive or negative, depending on both returns.
 
In Summary, investing in Foreign investments will be affected by the actual investment returns and the Foreign Exchange effect.