ACTA UNIVERSITATIS AGRICULTURAE ET SILVICULTURAE MENDELIANAE BRUNENSIS

Volume LX 54 Number 2, 2012

EXCHANGE RATE EUR/USD RISK IN

INVESTMENTS DENOMINATED IN USD
IN THE PERIOD OF THE FINANCIAL
AND ECONOMIC CRISIS

O. Šoba

Received: November 30, 2011

Abstract

ŠOBA, O.: Exchange rate EUR/USD risk in investments denominated in USD in the period of the financial and
economic crisis. Acta univ. agric. et silvic. Mendel. Brun., 2012, LX, No. 2, pp. 409–420

The paper discusses the evaluation of the influence of the EUR/USD exchange rate on the yield-rate
of dollar share investments from the viewpoint of the Euro investor in varying investment periods
with emphasis on the period of the financial and subsequent economic crisis targeted mainly in the
period 2008–2010.
The outputs of the paper are realized for the following investment periods: one-year, three-year, five-
year, seven-year, ten-year and fieen-year. The supplementary investment period is the twenty-year
period, which due to the small number of observations is characterized by low informative value.
The share investments denominated in USD are represented by investments in the S&P 500 Total Net
Return that also considers reinvestment in the period 1988–2010.
The basic methodical tool of the paper is quantification of the factors that influence the yield-rate
of the foreign currency investments in the reference currency of the investor. Quantification mainly
attaches to the ratio of the influence of the EUR/USD exchange rate on the yield-rate of the dollar
share investments from the viewpoint of the euro investor.

exchange risk, investment, exchange rate, return on investment, financial and economic crisis,
Standard&Poor’s 500

A foreign exchange investment can be understood
as an investment into foreign exchange assets
denominated in a foreign currency, different
from the reference currency of an investor. The
currency in which the investor uses revenue from
the investment is considered to be the reference
currency.
Exchange rate risk is then in the context of
a foreign currency investment seen as the impact
of an unexpected change of the relevant exchange
rate in the period of the given investment, which
is in particular to the profitability of the foreign
currency investment, if it is calculated from values
in the reference currency of the investor. The
relevant exchange rate is the reference currency of
the investor/ denomination currency of the foreign
currency investment.
Many various authors dealt on the topic of the
exchange rate risk in foreign currency investments
in the past. The topic of the importance of the
exchange rate for the international investment
decisions is discussed for example by Froot (1993),
who claims that the exchange rate risk can evaporate
in the very long investment horizons, which refer
to horizons in decades. Solnik and McLeavy (2004)
state similar knowledge as well, who claim that an
investor should be aware of the exchange rate risk
and that he should secure against it in particular in
short-term investment periods.
In publications, two types of recommendations
for investors undergoing an exchange rate risk
in terms of foreign currency investments can
be found. According to work of Arikawa and
Muralidhar (2006), on one side there are Perold

409
410
and Shulman (1988) who always recommend to be
fully secured in foreign currency investments, since
the exchange rate risk is not properly “paid” in the
foreign currency investments. On the other side,
there is Froot (1993), who represents also the basis
for the works of Solnik and McLeavey (2004) who
claim there is no need to be secured in long-term
investment horizons. The same declaration can be
found also at Siegel (2007).
The trendy decrease in the importance of the
exchange rate in foreign currency investments
with a growing length of the investment horizon
is primarily dependent on the fact that in the long-
term horizon the exchange rates tend to have
a weak trend component of their developing. This
can be very clearly demonstrated on Fig. 1 showing
the developing of the EUR/USD exchange rate in
the period 1988–2010. In the chart a very weak
long-term trend component of this exchange rate
developing can be observed.
A weak trend component of the long-term
developing is given especially by the character
of the exchange rate, which is, even if sometimes
counted among financial assets, not a financial asset.
It represents the price of one currency expressed
in another currency. If we focus on financial
assets in their factual form, their value in the long-
term horizon usually shows a trend growth. This
happens due to the fact that these are real assets
which bring certain forms of revenue in the future.
However, the exchange rate is not an asset whose
value would grow in the long-term trend, but it is
the price – conversion coefficient – which is given
by the interaction between supply and demand for
foreign currency. Furthermore, it should be noted
that the supply and demand for foreign currency
is a derived supply and demand, mainly for goods
or instruments whose price is expressed in foreign
currency (Pilbeam, 2005).
Arikawa and Muralidhar (2006) add to the
character of the exchange rate in comparison to
Developing of the EUR/USD exchange rate
in the period 1988-2010
1,4000
1,2000
1,0000
EUR/USD
0,8000
0,6000
0,4000
0,2000
0,0000
8
-8
-9
-9
-9
-9
II
II
II
II
II
II
1: Developing of the EUR/USD exchange rate in the period 1988–2010
Source: Federal Reserve Statistical Release (2011)
O. Šoba
financial assets (stocks and bonds), that there is an
important precondition existing at the financial
markets which is the fact that the value of securities
or an asset in general is equal to the present value of
all future cash flows coming from this asset. Even
though the exchange rate could be classified as
daily traded securities, it does not, in fact, generate
any interest revenue as a bond, any dividends as
shares and does not have any expected future cash
flows or a value in the real meaning as each typical
financial asset. Currencies are, however, referred to
as a medium of an exchange and, even if they are
traded in the same way as securities, they are not
financial assets in the real meaning.
The more the economies whose currencies create
the given exchange rate equal economically and
the lower inflation differential is between them,
the weaker is a long-term trend component of
an exchange rate developing. For example Baye
and Jansen (1995) state namely that in the long-
term horizon the exchange rates are determined
especially by an inflation differential and by the
developing of the real income in economies, while
in the short-term horizon mainly the interest rate
differential plays its role.
The calculation of the rate of return on foreign
currency asset investment is according to Solnik and
McLeavey (2004) going out of the equation:
R = RFC + s + (s × RFC), (1)
where:
R.......rate of return on foreign currency investment
from the period 0 to period 1
RFC ...performance of investment in its
denomination currency from the period 0 to
period 1
s ........change of the spot exchange rate within the
period of the investment, which is from the
period 0 to period 1.
Solnik and McLeavey (2004) point out that the
last component in the formula 1 is generally of
0
-9
-0
-0
-0
-0
-0
-1
II
II
II
II
II
II
period
Exchange rate EUR/USD risk in investments denominated in USD in the period of the financial and economic crisis 411
a low importance and is considered to be too small
for short-term periods to be able to influence the
total calculation in a more significant way. The
rate of return on foreign investment is therefore
primarily given by the equation. Should, however,
the calculation be as accurate as possible, also the
mentioned last component of the equation, which
is mainly in longer investment horizons, must be
considered.
Following conclusions can be then logically
applied to the formula 1:
1. A depreciation of a reference currency
(considering the direct quotation of the exchange
rate) in the period of the foreign currency
investment will result into an increase of its
rate of return quantified from the values in the
reference currency of the investor and vice versa.
2. The impact of the exchange rate on the rate of
return of a foreign currency investment can
be described as R − RFC. This difference shows,
among other things, by how many percentage
points the rate of return quantified in the
reference currency of the investor is for the same
investment higher (R) and in comparison to its
rate of return quantified in its denomination
currency (RFC). This difference further shows that
the impact of exchange rate developing is:
R − RFC = RFC + s + s × RFC − RFC = s + s × RFC.
In other words, if it is true that |RFC| > | s + s × RFC|,
then value will be more impacted by the
performance of investment in its denomination
currency and the impact of a change in the
relevant exchange rate will be smaller and vice
versa.
Therefore, two factors impact the rate of return
on foreign currency investment in the reference
currency of the investor directly: (1) performance of an
investment in its denomination currency (RFC) and (2) the
change of the relevant exchange rate (s + s × RFC).
The analysis of a change of an exchange rate on the
performance of the foreign currency investment can
be done for differently long investment horizons
based on the value comparison of both mentioned
basic factors. This means to analyze the impact
of investment performance in its denomination
currency (RFC) and the impact of change of the
relevant exchange rate (s + s × RFC). The factor whose
absolute value for the given period is higher impacts
the final performance of the foreign currency
investment more. Both factors must be considered
in their absolute forms (|RFC| and |s + s × RFC|) and
they are calculated as follows1:
V1
R FC  s  1 ,
V0
1 The calculated indicator can of course be multiplied by one hundred to get its percentage form.
where:
V0... is the value of an investment in its denomination
currency, or of the relevant exchange rate in the
period 0
V1... is the value of an investment in its denomination
currency, or of the relevant exchange rate in the
period 1.
The resultant impact of a change of an exchange
rate on the performance of a foreign currency
investment can thereinaer be quantified according
to the quotient:
|s + s × RFC| / (|RFC| and |s + s × RFC|. (3)
According to the value of this quotient (formula 3),
relevancy of the impact of an exchange rate
change on the rate of return on a foreign currency
investment can be derived. If the percentage value
of this quotient is equal 50 %, both factors should
impact the mentioned rate of return in the same
way. If the quotient value is higher than 50 %, the
exchange rate change had a bigger impact than
the investment performance in its denomination
currency, and in case the indicator value is lower
than 50 %, it is vice versa. If the quotient value
decreases from value of 50 % to zero, the exchange
rate loses its impact more and more.
Implying from formula 3, also the performance
of an investment in its denomination currency is,
in terms of both impacting factors, considered for
a calculation of the impact of the exchange rate
change on the rate of return on a foreign currency
investment. The period of the past financial and
following economic crisis was accompanied by the
significant price fluctuations on financial market,
which is mainly on the stock markets, which
impacted the partial performances of the share
investments very much.
Thus, there is a question in which way these
fluctuations could have impacted the importance
of the exchange rate risk in foreign currency
investments finished in this crisis period, which
is also in the context of conclusions of above
mentioned authors dealing on this topic. This article
thus implements the relevant quantification of the
impact of an exchange rate change in conducting
foreign currency stock investments more closely
targeted mainly at these investments finished in
the years 2008–2010, representing the mentioned
crisis period. The biggest stock market, it is the
stock market of the USA (according to the market
capitalization), and the most important world
currency pair (according to trading volumes on
foreign exchange markets) were chosen in this
connection to represent it. Therefore, the impact
of a change of the EUR/USD exchange rate on the
(2)
rate of return on dollar share investments in the
viewpoint of a euro investor is quantified here.
412 O. Šoba

The target of this article is to analyze the impact exchange rate. As for the data basis for the EUR/USD
of a change of the EUR/USD exchange rate on the exchange rate, its time series for the years 1988–
rate of return on dollar share investment in the 2010 was gained from official sources of the Federal
viewpoint of a euro investor in differently long Reserve System of the United States of America,
investment horizons targeted at these investments while for the period 1988–1998 the conversion to
finished in the time of the financial and economic ECU was accepted.
crisis. This period is set between the years 2008– The developing of the value and the performance
2010. of the S&P 500 Total Net Return index from
February 1988 to December 2010 are shown on
Fig. 2. A similar trend developing for the value and
METHODS AND RESOURCES
the performance of the index in both currencies
We got the outputs for the following investment in the years 1988–2010 can be seen in this picture.
horizons: one-year, three-year, five-year, seven- However, there still remains a question, what was
year, ten-year and fieen-year. The supplementary the impact of the change of the EUR/USD exchange
horizon is the twenty-year one, where the received rate on the rate of return on the investments done
results have a lower evidence potential due to on this market by a euro investor within individual
a lower number of observations. Share investments investment horizons.
denominated in USD are represented by In the Fig. 2, the developing of value and
investments in the S&P 500 Total Net Return share performance of the S&P 500 Total Net Return
index considering also the dividend reinvestments, in USD and of the exchange rate from February 1988
which is in the years 1988–2010. The developing of to December 2010 are shown, from which a strong
the values of this index was, based on our request, trend component of the developing of the index
sent directly from the company Standard & Poor’s value and in contrary a very weak trend component
in an electronic form, and a relevant electronic of the developing of the EUR/USD exchange rate
source for these data cannot therefore be given, as value can be deduced.
it is in the case of the developing of the EUR/USD

Developing of the S&P 500 Total Net Return index Performance of the S&P 500 Total Net Return index

3000 1200

2500 1000

2000 800

1500 600
%

1000 400

200
500
0
0
-200
2

0
8

II-8 8
II-8 9
II-9 0
II-9 1
II-9 2
II-9 3
II-9 4
II-9 5
II-9 6
II-9 7
II-9 8
II-9 9
II-0 0
II-0 1
II-0 2
II-0 3
II-0 4
II-0 5
II-0 6
II-0 7
II-0 8
II-0 9
II-1 0
-0

-0

-0

-1
-8

-9

-9

-9

-9

-9

-0

-0
II

II

II

II

II
II

II

II

II

II

II

II

period
period
in USD in EUR
calculated from USD calculated from EUR

2: Developing of the value and performance of the S&P 500 Total Net Return index
Source: Standard & Poor’s, Federal Reserve Statistical Release (2011); calculations by author.

Developing of the S&P 500 Total Net Return index Performance of the S&P 500 Total Net Return index
and of the EUR/USD exchange rate and of the EUR/USD exchange rate

1,4000 3000 900

800
1,2000 2500 700
1,0000 600
2000
E U R /U SD

0,8000 500
U SD

1500 400
%

0,6000 300
1000 200
0,4000
500 100
0,2000
0
0,0000 0 -100
II-88

II-90

II-92

II-94

II-96

II-98

II-00

II-02

II-04

II-06

II-08

II-10
8

0
-8

-9

-9

-9

-9

-9

-0

-0

-0

-0

-0

-1
II

II

II

II

II

II

II

II

II

II

II

II

period period
EUR/USD S&P Net Total Return S&P 500 Net Total Return USD/EUR

3: Developing of the value and performance of the S&P 500 Total Net Return index and of the EUR/USD exchange rate
Source: Standard & Poor’s, Federal Reserve Statistical Release (2011); calculations by author
Exchange rate EUR/USD risk in investments denominated in USD in the period of the financial and economic crisis 413

I: Number of foreign currency share investments for individual investment horizons

Length of the horizon 1 year 3 years 5 years 7 years 10 years 15 years 20 years
Number of investments 263 239 215 191 155 95 35
Source: calculations by author

To quantify and analyze the impact of a change of influence of exchange rate on rate of return on the
the EUR/USD exchange rate on the rate of return on foreign currency was bigger than influence of the
dollar share investments in the viewpoint of a euro performance of the investment in currency of its
investor, monthly closing values of the EUR/USD denomination and vice versa. Concrete value of
exchange rate and values of the S&P 500 Total Net exchange rate importance (influence) is calculated
Return index in the period 1988–2010, which is by the quotient in the second chart in the pair.
a 23-year period, were taken as basic information. The second of the chart pairs shows the values
The official monthly closing values of the EUR/USD of quotient of a change of the EUR/USD exchange
exchange rate for the given period were received rate on the rate of return on individual dollar share
from the Federal Reserve System. investments in the viewpoint of a euro investor
The number of input values (observations) of both for the given investment horizon (see formula 3 in
of these variables for individual investment horizons metodology of the paper:
(or better the number of simulated foreign currency
investments for individual investment horizons) (|s + s × RFC| / |s + s × RFC| + |RFC|).
is given in Tab. I. The number always describes the
If the quotient is equal 50 % both factors had
maximum number of foreign currency investments
the same influence on rate of return on the dollar
for the given horizon in the monitored period (on
investments in the viewpoint of a euro investor
the assumption of monthly data).
(|RFC| = |s + s × RFC|). If the quotient is over 50 %
We analyzed the factors impacting the rate of
influence of exchange rate was more important
return on dollar bond investment in the viewpoint
than influence of dollar investment performance
of a euro investor to get an empiric analysis of the
(|RFC| < |s + s × RFC|) and if the quotient is bellow
impact of a change of the EUR/USD exchange rate
50 % influence of exchange rate was less important
on the rate of return on dollar share investments in
than influence of dollar investment performance
the viewpoint of a euro investor (see Formula 3 in
(|RFC| > |s + s × RFC|). Stability of the impact for
the methodology of this article). |s + s × RFC|/(|RFC|
concrete investment horizon can be calculated by
and |s + s × RFC|
the standard deviation or coefficient of variation.
If also the twenty-year horizon was analyzed,
RESULTS AND DISCUSSION where, however, the analysis would be done on 35
The reached results for individual chosen input values and that is why it is not included among
investment horizons are, according to the the basic investment horizons for share investments,
methodology of this article, presented on individual outcomes stated in Fig. 10 would be the results.
pairs of charts (see Fig. 4 to Fig. 10). The first chart of Fig. 11 demonstrates a developing of the average
the given pair compares the performances of partial quotient value of the impact of a change of the
share investments in USD (|RFC|) for the given EUR/USD exchange rate on the rate of return on
investment horizon with the impact of a change dollar share investments in the viewpoint of a euro
of the EUR/USD exchange rate (| s + s × RFC|), see investor depending on the length of the investment
methodology of the paper. If |RFC| < |s + s × RFC|, horizon. A trend decrease in this impact depending

Factors of the rate of return on a dollar share investment in the viewpoint Quotient of the impact of the EUR/USD exchange rate on the rate
of a euro investor for a one-year investment horizon of return on a dollar share investment in the viewpoint of a euro
investor for a one-year investment horizon
60 100
50
80
40
30 60
%

20 40
10
20
0
II-89

II-91

II-93

II-95

II-97

II-99

II-01

II-03

II-05

II-07

II-09

0
II-89

II-91

II-93

II-95

II-97

II-99

II-01

II-03

II-05

II-07

II-09

Period of the finished investment

Performance of a dollar share investment Impact of the exchange rate Period of the finished investment

4: One-year horizon
Source: calculations by author
414 O. Šoba

Factors of the rate of return on a dollar share investment in the viewpoint Quotient of the impact of the EUR/USD exchange rate on the rate
of a euro investor for a three-year investment horizon of return on a dollar share investment in the viewpoint of a euro
investor for a three-year investment horizon
160 100
140
120 80
100
60
80
%

%
60 40
40
20 20
0
0
II-91

II-93

II-95

II-97

II-99

II-01

II-03

II-05

II-07

II-09

II-91

II-93

II-95

II-97

II-99

II-01

II-03

II-05

II-07

II-09
Period of the finished investment
Performance of a dollar share investment Impact of the exchange rate Period of the finished investment

5: Three-year horizon
Source: calculations by author

Factors of the rate of return on a dollar share investment in the viewpoint Quotient of the impact of the EUR/USD exchange rate on the rate
of a euro investor for a five-year investment horizon of return on a dollar share investment in the viewpoint of a euro
investor for a five-year investment horizon
300 100

250 80
200
60
150
%

100 40
50
20
0
0
II-93
II-94
II-95
II-96
II-97
II-98
II-99
II-00
II-01
II-02
II-03
II-04
II-05
II-06
II-07
II-08
II-09
II-10

II-93

II-95

II-97

II-99

II-01

II-03

II-05

II-07

II-09
Period of the finished investment
Performance of a dollar share investment Impact of the exchange rate Period of the finished investment

6: Five-year horizon
Source: calculations by author

Factors of the rate of return on a dollar share investment in the viewpoint Quotient of the impact of the EUR/USD exchange rate on the rate
of a euro investor for a seven-year investment horizon of return on a dollar share investment in the viewpoint of a euro
investor for a seven-year investment horizon
350 100
300
80
250
200 60
%

150
100 40
50 20
0
0
II-95
II-96
II-97
II-98
II-99
II-00
II-01
II-02
II-03
II-04
II-05
II-06
II-07
II-08
II-09
II-10

II-95
II-96
II-97
II-98
II-99
II-00
II-01
II-02
II-03
II-04
II-05
II-06
II-07
II-08
II-09
II-10

Period of the finished investment

Period of the finished investment
Performance of a dollar share investment Impact of the exchange rate

7: Seven-year horizon
Source: calculations by author

on the increasing length of an investment horizon the time before crisis (1988–2007) and in the crisis
can be observed here, which corresponds with the period (2008–2010), the average values of the given
conclusions of authors mentioned at the beginning quotient for individual investment horizons will be
of this article saying that the impact of an exchange as follows (see Fig. 12).
rate change on the rate of return on foreign currency Fig. 13 demonstrates variability of the quetient
investment goes down in longer investment value measured by coefficient of variation. Period
horizons. 1988–2010 is dividend into two parts again. First part
However, if the investments finished in the years represents period 1988–2007 and the second period
1988–2010 are divided into investments finished in 2008–2010. Impact of exchange rate was more stable
Exchange rate EUR/USD risk in investments denominated in USD in the period of the financial and economic crisis 415

Factors of the rate of return on a dollar share investment in the viewpoint Quotient of the impact of the EUR/USD exchange rate on the rate
of a euro investor for a ten-year investment horizon of return on a dollar share investment in the viewpoint of a euro
investor for a ten-year investment horizon
600 100
500
80
400
60
300
%

%
40
200

100 20

0 0
II-98

II-99

II-00

II-01

II-02

II-03

II-04

II-05

II-06

II-07

II-08

II-09

II-10

II-98

II-99

II-00

II-01

II-02

II-03

II-04

II-05

II-06

II-07

II-08

II-09

II-10
Period of the finished investment
Period of the finished investment
Performance of a dollar share investment Impact of the exchange rate

8: Ten-year horizon
Source: calculations by author

Factors of the rate of return on a dollar share investment in the viewpoint Quotient of the impact of the EUR/USD exchange rate on the rate
of a euro investor for a fiftteen-year investment horizon of return on a dollar share investment in the viewpoint of a euro
investor for a fiftteen-year investment horizon
500 100
400
80
300
60
%

200
40
100
20
0
0
VIII-03

VIII-04

VIII-05

VIII-06

VIII-07

VIII-08

VIII-09

VIII-10
II-03

II-04

II-05

II-06

II-07

II-08

II-09

II-10
3

VI 4

V I 05

V I 06

VI 7

V I 08

V I 09

VI 0
03

04

05

06

07

08

09

10
-0

-0

-0

-1
-

-
I I-

I I-

I I-

I I-

I I-

I I-

I I-

I I-
II

II

II

II

II

II

II

II
VI

Period of the finished investment

Performance of a dollar share investment Impact of the exchange rate Period of the finished investment

9: Fifteen-year horizon
Source: calculations by author

Quotient of the impact of the EUR/USD exchange rate on the rate of

Factors of the rate of return on a dollar share investment in the viewpoint
of a euro investor for a twenty-year investment horizon return on a dollar share investment in the viewpoint of a euro investor
for a twenty-year investment horizon
800 100
700
600 80
500
400 60
%

300
40
200
100
20
0
0
08

09

10
8

0
8

09

10
8

0
-0

-0

-1
0

-0

-0

-1
V-

V-

V-
II-

II-

II-
II

XI

II

XI

II

XI
VI

VI

VI

0
08

09

10
8

0
8

0
-0

-0

-1
-0

-0

-1
I-0

I-0

I-1
I-

I-

I-
V

V
II

II
II
II

II

II
X

Period of the finished investment

V

Performance of a dollar share investment Impact of the exchange rate Period of the finished investment

10: Twenty-year horizon

Source: calculations by author

especially in five to ten-years investment horizons in this period in middle-term investment horizons
in period 2008–2010 (financial and economic crisis) (5 to 10 years) is evident too (see Fig. 13).
than in period (1988–2007). In the case of short investment horizons (1 to
In Fig. 12, an increase in the average impact of 3 years) average impact of the exchange rate (see
a change of the EUR/USD exchange rate on the Fig. 12) was relatively insignificant in comparison
rate of return on dollar share investments in the to medium-term investment horizons (5 to 10
viewpoint of a euro investor in period 2008 and years), when the developing of a change of the
2011 is evident. Increasing of stability of the impact EUR/USD exchange rate had in average a bigger
416 O. Šoba

Average quotient value of the impact of a change of the EUR/USD

exchange rate on the rate of return on a dollar share investment in the
viewpoint of a euro investor depending on the length of horizon

70,00
60,00

50,00
37,62 36,83 34,94
40,00
31,31
%

27,52
30,00
14,74
20,00
11,31
10,00
0,00
1 3 5 7 10 15 20
length of horizon (in years)

11: Average quotient value of the impact of an exchange rate by the length of horizon
Source: calculations by author

Average quotient value of the impact of a change of the EUR/USD exchange rate on the
rate of return on a dollar share investment in the viewpoint of a euro investor depending on
the length of horizon
70,00
60,00
50,00
40,00
%

30,00
20,00
10,00
0,00
1,00 3,00 5,00 7,00 10,00 15,00 20,00
investments finished between 37,80 31,10 33,81 30,05 17,03 8,63
1988 – 2007
investments finished between 36,49 32,50 51,84 56,01 62,19 15,69 14,74
2008 - 2010
length of horizon (in years)

12: Average quotient value of the impact of an exchange rate change (investments finished in the
years 1988–2007 and 2008–2010)
Source: calculations by author

Variability of the impact of a change of the EUR/USD exchange rate on the rate of return on
a dollar share investment in the viewpoint of a euro investor depending on the length of
horizon
1,00

0,80

0,60
%

0,40

0,20

0,00
1,00 3,00 5,00 7,00 10,00 15,00 20,00
investments finished between 0,55 0,75 0,74 0,65 0,81 0,60
1988 – 2007
investments finished between 0,64 0,62 0,47 0,35 0,33 0,49 0,56
2008 - 2010
length of horizon (in years)

13: Variability of the impact of an exchange rate change (investments finished in the years 1988–2007
and 2008–2010)
Source: calculations by author
Exchange rate EUR/USD risk in investments denominated in USD in the period of the financial and economic crisis 417

Quotient of the impact of an exchange rate change on its total impact on the rate of return on a dollar
share investment in the viewpoint of a euro investor

100

80

60
%

40

20

0
II-88

II-89
II-90

II-91

II-92
II-93

II-94
II-95

II-96
II-97

II-98

II-99
II-00

II-01
II-02

II-03
II-04

II-05

II-06
II-07

II-08
II-09

II-10
period of the finished investment
1 year 3 years 5 years 7 years 10 years 15 years 20 years

14: Developing of the impact of an exchange rate change in individual investment horizons
Source: calculations by author

impact on the rate of return on dollar share in USD finished in this period or in other words
investments in the viewpoint of a euro investor the decrease of values. Since no decrease in value
than the performance of share investments in USD (s) meaning a change of the EUR/USD2 exchange
themselves. These conclusions are thus inconsistent rate appeared in a similar way in the period of the
with the statements of authors Solnik and McLeavey given investment, it is logical that the impact of
(2004), Froot (1993) or Siegel (2007), who claim the the EUR exchange rate on the rate of return on
necessity of securing foreign currency investments dollar share investments in the viewpoint of a euro
against the exchange rate risk in the case of short- investor finished in this period increased and the
term horizons. Implying from the above mentioned impact of performance of these investments in USD
calculations, this risk played an important role decreased.
also for medium-term and long-term horizons However, a question, whether this fact is valid just
represented for example by a ten-year investment for the investments finished in the years 2008–2010,
horizon. remains open. When the quotient value developing
A considerable growth of the average impact of an of the impact of a change of the EUR/USD exchange
exchange rate change was noticed also in the case of rate on the rate of return on dollar share investments
a fieen-year investment horizon (higher stability in the viewpoint of a euro investor for individual
of the impact too). In the case of the supplementary investment horizons (always the second chart from
twenty-year horizon, no investment, in terms of the Fig. 4 to Fig. 10) is displayed in one chart only (see
the monitored period 1988–2010, was finished Fig. 14), it is obvious that the impact of a change of the
before 2008, therefore no comparison of results EUR/USD exchange rate had a growing trend for the
in this investment horizon could have been done. horizons lasting 3 to 10 years already approximately
But also a ten-year and a fieen-year investment from the years 2000 to 2001, which were connected
horizon are in the case of share investments long with the so called dotcom speculative bubble,
and representative enough as investment horizons. which represented the beginning of a relatively
A value slump in the American stock market turbulent period on this market in the past 10 years
is the reason for an increase in the impact of the (see Fig. 2 and Fig. 3). This period is connected with
EUR/USD exchange rate on the rate of return several important drops on this market which were
on dollar share investments in the viewpoint of increasing the impact of an exchange rate change on
a euro investor finished in the times of economic the rate of return on foreign currency investments
and financial crisis (2008–2010), which means done on this market. The most important increase
a decrease in the performance of dollar investments of the impact of an exchange rate change appeared

2 Looking at the Fig. 3, an independent trend developing of the value of the EUR/USD exchange rate and of the American
share in the years 1988 to 2010 is obvious. A rational economic explanation for a partial correlation between these
variables exists, but both variables are influenced by many other factor which cannot be omitted.
418 O. Šoba

for the investments finished in the years 2008–2010,
which is in the times of the financial and following
economic crisis. The crises increased influence of
exchange rate on rate of return on foreign exchange
investments in middle-term investments horizons
because of deep stock market decreasing and
stability of the influence was increasing in these
horizons too. It means, financial and economic crisis
increased importance of exchange risk in the case
of foreign exchange investments in the market in
middle-term horizons.
CONCLUSION
The importance of an exchange rate risk connected
with globalization of the world financial system and
of the much larger investment opportunities for
investors also by foreign currency investments is,
in case of investments not secured against this risk,
growing.
The article discussed investments on the most
important world stock market (according to the
market capitalization), which is the stock market
of the USA, when an exchange rate risk given
by the impact of a change of the most important
world currency pair EUR/USD (according to
trading volumes on foreign exchange markets) was
undergone.
Going out of an empiric analysis, the article
proved a significant growth of the impact of the
EUR/USD exchange rate on the rate of return on
dollar share investments in the viewpoint of a euro
investor in period of financial and economic crisis
(2008–2010), especially in middle-term horizons,
and higher stability of the impact in these horizons
too, which appeared because of higher turbulences
on this market connected with its deeper drops,
which were not accompanied by an adequate change
of the EUR/USD exchange rate. This was valid
also for medium-term and long-term investment
horizons (a ten-year to a fieen-year horizon),
which is for such lengths of the investment horizon,
in which other authors consider the exchange rate
risk and its impact on the rate of return on foreign
currency investments to be relatively insignificant.
A globalization of the world financial system,
however, does not mean only new investment
opportunities; it means also closer and closer
connection of individual partial markets connected
with a very similar course of events on these markets.
This includes common appearance of turbulences
connected with deeper drops of values of these
markets. Because of this reason, a similar growth of
the impact of an exchange rate in foreign currency
investments can be expected also when done on
other markets (with deeper drops of values of these
markets), which is even in the following periods,
and the exchange rate risk must not be omitted in
the foreign currency investments, even not in longer
investment horizons.

SUMMARY
The paper discusses the evaluation of the influence of the EUR/USD exchange rate on the yield-rate
of dollar share investments from the viewpoint of the Euro investor in varying investment periods
with emphasis on the period of the financial and subsequent economic crisis targeted mainly in the
period 2008–2010.
The outputs of the paper are realized for the following investment periods: one-year, three-year, five-
year, seven-year, ten-year and fieen-year. The supplementary investment period is the twenty-year
period, which due to the small number of observations is characterized by low informative value.
The share investments denominated in USD are represented by investments in the S&P 500 Total Net
Return that also considers reinvestment in the period 1988–2010.
The basic methodical tool of the paper is quantification of the factors that influence the yield-rate
of the foreign currency investments in the reference currency of the investor. Quantification mainly
attaches to the ratio of the influence of the EUR/USD exchange rate on the yield-rate of the dollar
share investments from the viewpoint of the euro investor.
The article proved a significant growth of the impact of the EUR/USD exchange rate on the rate of
return on dollar share investments in the viewpoint of a euro investor in period of financial and
economic crisis (2008–2010), especially in middle-term horizons, and higher stability of the impact in
these horizons too, which appeared because of higher turbulences on this market connected with its
deeper drops, which were not accompanied by an adequate change of the EUR/USD exchange rate.
This was valid also for medium-term and long-term investment horizons (a ten-year to a fieen-year
horizon), which is for such lengths of the investment horizon, in which other authors consider the
exchange rate risk and its impact on the rate of return on foreign currency investments to be relatively
insignificant.

Acknowledgement
This article was prepared within the scope of problem-solving to the Thematic orientation 02 of the
Scientific research of FBE MUB MSM 6215648904 Czech economy in processes of integration and
globalization and developing of the agricultural sector and sector of services in the new conditions of
an integrated European market.
Exchange rate EUR/USD risk in investments denominated in USD in the period of the financial and economic crisis 419

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Address
Ing. Oldřich Šoba, Ph.D., Ústav financí, Mendelova univerzita v Brně, Zemědělská 1, 613 00, Brno, Česká
republika, e-mail: oldrich.soba@mendelu.cz
420