Final answer:
The statement is true; an increase in the nominal AUD/HKD exchange rate implies that each Australian dollar translates into more Hong Kong dollars, which increases the AUD-denominated value of investments made in Hong Kong when converted back into Australian currency.
Step-by-step explanation:
The statement that an increase in the nominal AUD/HKD exchange rate will lead to an increase in the AUD-denominated value of your Hong Kong investment is true. If the exchange rate between the Australian dollar (AUD) and the Hong Kong dollar (HKD) increases, it means that each AUD buys more HKD than before. When converting the value of the Hong Kong investments back to AUD, you will receive more Australian dollars. This happens because the exchange rate serves as a multiplier when converting investments from the foreign currency back to the investor's home currency.
For example, if you are an Australian investor and the exchange rate moves from 1 AUD = 5 HKD to 1 AUD = 6 HKD, then your investment in Hong Kong dollars will yield more Australian dollars when you convert it back, assuming the investment's value in HKD remains constant. This increase in value from currency exchange is separate from any capital gains or dividends the investment itself might accrue.
Business people often link portfolio investment to expectations about how exchange rates will shift. Thus, beliefs about the future path of exchange rates can be self-reinforcing and affect an investor's decision on whether to hold or sell foreign investments. If a currency is expected to appreciate in the future, investors may buy more of that currency now, causing immediate appreciation, as they expect higher returns upon conversion back to their home currency in the future.