Exercise – calculating foreign investment returns

A European investor is investing in the Indian stock market. He uses an investment certificate,
which reflects the development of the well-known index “S&P BSE SENSEX” and is
denominated in Indian Rupee (INR). Two years ago, he invested an amount of 100,000 EUR.
Now, it is time to evaluate the performance and to decide on the future position.

a) The BSE index and the Indian Rupee have developed as given in the following table.

2 years ago
(purchase) 1 year ago today
BSE index level 28,000 24,500 28,500
exchange rate
(INR/EUR) 67.50 71.00 72.85

Calculate the yearly rates of return (year 1 and year 2) as well as the total rate of return in
EUR (i.e. in the investor’s home currency). Express the return as a combination of the index
return and the currency return.

b) The investor is still positive regarding India’s economic development. A BSE index return of
at least half of last year’s return seems very plausible to him for the next year. As a future
exchange rate (end of next year) the investor expects 75.75 INR/EUR.
What investment rate of return (in EUR) can the investor expect?