Question

If the expected rate of return from the investment projects in India be 10% per annum, and if the exchange rate becomes Rs.88 per USD from Rs.80 per USD in one year, what would be the expected amount of profit in terms of US Dollar from an investment project of 100 Million USD in India from the point of view of an investor from the USA?

• A. Zero.
• B. USD 110 Million.
• C. USD 80 Million.
• D. USD 88 Million.

Hint:

How do exchange rates affect profits from foreign investments?

Answer 1

The Correct Option is A

The expected return in India is 10%, so the investment would grow to 100 Million USD × 1.10 = 110 Million USD.

However, the exchange rate change results in a devaluation of the rupee (Rs.88 per USD compared to Rs.80), which eliminates the profit when converted back to USD.

Therefore, the profit in USD is zero. Hence, the correct answer is (a).