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Impact of currency appreciation on overseas investments

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asked Nov 16, 2017 in BUS 4027W - Actuarial Risk Management by Njabulo.Dube (2,950 points)

Why would a strengthening currency be beneficial for overseas investment? Let's say we invest in 'Murica, and the current exchange rate is \( R1 = $1 \). We buy $10 to buy US investments. Then the currency appreciates/strengthens to \( R1 = $1.5 \). When we convert the instruments we bought (assuming no change in value) back to Rands, then we get less money out (we now have R6.67). Surely we benefit from a depreciation of the domestic currency as opposed to an appreciation?

1 Answer

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answered Nov 16, 2017 by Njabulo.Dube (2,950 points)
Ideally investments should be selected such that they match liabilities according to nature, term, currency and uncertainty. Using this framework, one would invests overseas if the liabilities are denominated in a foreign currency in order to reduce exchange rate risk. If this is indeed the case, then an appreciation in the local currency would be beneficial because we get more dollars for the same amount of Rands meaning that in Rand terms the dollar denominated investment is cheaper.