Math help in foreign cd's

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AtomicPhil
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Math help in foreign cd's

Post by AtomicPhil » Mon Aug 01, 2011 3:21 am

Ok my math is not as great or it could be i have to much things in mind. well i have been looking into investing money in a foreign cd and while doing some research i have read that once it get to maturity and you convert the lets say yuan to dollars you can loose if dollar strengthens but win if the yuan gains. how would i get about finding out my gains of all this?

for example yuan before maturity 3.0000 - After 2.8000 towards $1 and lets say interest rates are 5% . anyone can help out or give me some type of light and clue.. thanks

Valuethinker
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Re: Math help in foreign cd's

Post by Valuethinker » Mon Aug 01, 2011 4:55 am

AtomicPhil wrote:Ok my math is not as great or it could be i have to much things in mind. well i have been looking into investing money in a foreign cd and while doing some research i have read that once it get to maturity and you convert the lets say yuan to dollars you can loose if dollar strengthens but win if the yuan gains. how would i get about finding out my gains of all this?

for example yuan before maturity 3.0000 - After 2.8000 towards $1 and lets say interest rates are 5% . anyone can help out or give me some type of light and clue.. thanks


My immediate response is if you cannot do the math on these things, you shouldn't be doing them. This is not a low risk investment by any stretch of the imagination.

For example, what's the FDIC position on these CDs?

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nisiprius
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Re: Math help in foreign cd's

Post by nisiprius » Mon Aug 01, 2011 5:55 am

AtomicPhil wrote:Ok my math is not as great or it could be i have to much things in mind. well i have been looking into investing money in a foreign cd and while doing some research i have read that once it get to maturity and you convert the lets say yuan to dollars you can loose if dollar strengthens but win if the yuan gains. how would i get about finding out my gains of all this?

for example yuan before maturity 3.0000 - After 2.8000 towards $1 and lets say interest rates are 5% . anyone can help out or give me some type of light and clue.. thanks
I agree strongly with Valuethinker, you shouldn't be doing this.

But here's the answer to your question... just using your numbers as you've given them, and not dealing with costs or taxes or investment risks, or the difference between bid and asked. (If you walk up to a "foreign exchange" counter in an airport and give them $1,000 and exchange them for Euros, and then you take those Euros back to the same counter and exchange them for dollars you do NOT end up with $1,000. You always lose a little on the exchange.)

Let's say you have $1,000.

First, you need to convert it to yuan. In your example, you say that initially, $1 buys 3.0 yuan. So, you have 3,000 yuan. With my science background, I like to write it out this way, it helps me to keep straight whether to multiply or divide. Some find this helpful, some don't:

1,000 dollar * (3.0 yuan / dollar) = 3,000 yuan

(The point is that if you're used to doing algebra, you see that the dollars cancel leaving you with yuan).

Now, you need to calculate 5% interest on it each year. This is easy to do on a calculator but you may need to check the instruction book for the exact way to do it on your calculator.

Sometimes you key in "plus" then enter 5 then press the "percent" button. I personally have a math rather than a finance background and prefer to do this by multiplying by 1.05.

The best way to do this is to use a computer spreadsheet like Excel. Spreadsheets are such a basic investing tool that you really need to get one and master it if you plan to do any investing.

Year 1: 3,000 yuan +5%, or 3,000 times 1.05, = 3,150 yuan
Year 2: 3,150 yuan +5%, or 3,150 times 1.05, = 3,307.50 yuan
Year 3: 3,307.50 yuan +5%, or 3,307.50 times 1.05 = 3,472.875 yuan

Now, in your example, you say that the exchange rate changes and you get only 2.8 yuan per dollar. Well, this is good for you, because it means the dollar is worth less and the yuan is worth more.

When you convert back to dollars at 2.8 yuan per dollar, you have to divide by 2.8. If it's not clear to you why you need to divide rather than multiply, you do need to work on your math. But,

3,472.875 yuan / (2.8 yuan / dollar) = $1240.32.

If you'd kept the money in a U. S. bank, start with $1,000 and add 5% three times you'd have only $1157.625.

In this case, the currency change worked in your favor.

By the way, I wouldn't rely on it as more than a rough guide but if you type in "$1,000 in yuan" into Google, it gets exchange rates somewhere and it tells me

"US$ 1000 = 6 433.80579 Chinese yuan. Rates provided for information only - see disclaimer."
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stratton
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Post by stratton » Mon Aug 01, 2011 3:40 pm

There are usually currency conversion costs both ways. Typically 1.5% to 2% for each conversion.

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AtomicPhil
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Re: Math help in foreign cd's

Post by AtomicPhil » Wed Aug 03, 2011 8:57 pm

nisiprius wrote:
AtomicPhil wrote:
When you convert back to dollars at 2.8 yuan per dollar, you have to divide by 2.8. If it's not clear to you why you need to divide rather than multiply, you do need to work on your math. But,

3,472.875 yuan / (2.8 yuan / dollar) = $1240.32.



Im good with percentage, and to understand your math better or algebra all together i copied and saved and tried to understand which i did. so far so good just working to much my head aint clear so had to get this out my chest since it was bothering me thanks by the way...

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magician
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Re: Math help in foreign cd's

Post by magician » Tue Feb 28, 2012 5:23 pm

AtomicPhil wrote:Ok my math is not as great or it could be i have to much things in mind. well i have been looking into investing money in a foreign cd and while doing some research i have read that once it get to maturity and you convert the lets say yuan to dollars you can loose if dollar strengthens but win if the yuan gains. how would i get about finding out my gains of all this?

for example yuan before maturity 3.0000 - After 2.8000 towards $1 and lets say interest rates are 5% . anyone can help out or give me some type of light and clue.. thanks

I humbly suggest that if your math is not all that great, you have no business investing in foreign CDs (or trying FOREX trading, per your other thread).

I'd encourage you to take a math class or two before embarking on this adventure.
Simplify the complicated side; don't complify the simplicated side.

staustin
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Re: Math help in foreign cd's

Post by staustin » Tue Feb 28, 2012 5:28 pm

It's a highly risky means of stretching for yield. Unless you visit the country annually, plan to move there, or have some sort of residence and need to transact business, best avoided. Buy hard assets instead. At least this way you can put them in a vault in your house or safe deposit box.

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