国际财务管理答案Chap015.docx

国际财务管理答案Chap015.docx

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国际财务管理答案Chap015

CHAPTER15INTERNATIONALPORTFOLIOINVESTMENTS

SUGGESTEDANSWERSANDSOLUTIONSTOEND-OF-CHAPTER

QUESTIONSANDPROBLEMS

QUESTIONS

1.Whatfactorsareresponsiblefortherecentsurgeininternationalportfolioinvestment（IPI）?

Answer:

Therecentsurgeininternationalportfolioinvestmentsreflectstheglobalizationoffinancialmarkets.Specifically,manycountrieshaveliberalizedandderegulatedtheircapitalandforeignexchangemarketsinrecentyears.Inaddition,commercialandinvestmentbankshavefacilitatedinternationalinvestmentsbyintroducingsuchproductsasAmericanDepositoryReceipts（ADRs）andcountryfunds.Also,recentadvancementsincomputerandtelecommunicationtechnologiesledtoamajorreductionintransactionandinformationcostsassociatedwithinternationalinvestments.Inaddition,investorsmighthavebecomemoreawareofthepotentialgainsfrominternationalinvestments.

2.Securityreturnsarefoundtobelesscorrelatedacrosscountriesthanwithinacountry.Whycanthisbe?

Answer:

Securityreturnsarelesscorrelatedprobablybecausecountriesaredifferentfromeachotherintermsofindustrystructure,resourceendowments,macroeconomicpolicies,andhavenon-synchronousbusinesscycles.Securitiesfromasamecountryaresubjecttothesamebusinesscycleandmacroeconomicpolicies,thuscausinghighcorrelationsamongtheirreturns.

3.Explaintheconceptoftheworldbetaofasecurity.

Answer:

Theworldbetameasuresthesensitivityofreturnstoasecuritytoreturnstotheworldmarketportfolio.Itisameasureofthesystematicriskofthesecurityinaglobalsetting.Statistically,theworldbetacanbedefinedas:

Cov（Ri,RM）/Var（RM）,

whereRiandRMarereturnstothei-thsecurityandtheworldmarketportfolio,respectively.

4.ExplaintheconceptoftheSharpeperformancemeasure.

Answer:

TheSharpeperformancemeasure（SHP）isarisk-adjustedperformancemeasure.Itisdefinedasthemeanexcessreturntoaportfolioabovetherisk-freeratedividedbytheportfolio’sstandarddeviation.

5.Explainhowexchangeratefluctuationsaffectthereturnfromaforeignmarketmeasuredindollarterms.Discusstheempiricalevidenceontheeffectofexchangerateuncertaintyontheriskofforeigninvestment.

Answer:

ItisusefultorefertoEquations11.4and11.5ofthetext.Exchangeratefluctuationsmostlycontributetotheriskofforeigninvestmentthroughitsownvolatilityaswellasitscovariancewiththelocalmarketreturns.Thecovariancetendstobepositiveinmostofthecases,implyingthatexchangeratechangestendtoaddtoexchangerisk,ratherthanoffsetit.Exchangeriskisfoundtobemuchmoresignificantinbondinvestmentsthaninstockinvestments.

6.Wouldexchangeratechangesalwaysincreasetheriskofforeigninvestment?

Discusstheconditionunderwhichexchangeratechangesmayactuallyreducetheriskofforeigninvestment.

Answer:

Exchangeratechangesneednotalwaysincreasetheriskofforeigninvestment.Whenthecovariancebetweenexchangeratechangesandthelocalmarketreturnsissufficientlynegativetooffsetthepositivevarianceofexchangeratechanges,exchangeratevolatilitycanactuallyreducetheriskofforeigninvestment.

7.Evaluateahomecountry’smultinationalcorporationsasatoolforinternationaldiversification.

Answer:

DespitethefactthatMNCshaveoperationsworldwide,theirstockpricesbehaveverymuchlikepurelydomesticfirms.Thisispuzzlingyetundeniable.Asaresult,MNCsareapoorsubstitutefordirectforeignportfolioinvestments.

8.Discusstheadvantagesanddisadvantagesofclosed-endcountryfunds（CECFs）relativetotheAmericanDepositoryReceipts（ADRs）asameansofinternationaldiversification.

Answer:

CECFscanbeusedtodiversifyintoexoticmarketsthatareotherwisedifficulttoaccesssuchasIndiaandTurkey.Beingaportfolio,CECFsalsoprovideinstantdiversification.ADRsdonotprovideinstantdiversification;investorsshouldformportfoliosthemselves.Inaddition,therearerelativelyfewADRsfromemergingmarkets.ThemaindisadvantageofCECFsisthattheirsharepricesbehavesomewhatlikethehostcountry’sshareprices,reducingthepotentialdiversificationbenefits.

9.Whydoyouthinkclosed-endcountryfundsoftentradeatapremiumordiscount?

Answer:

CECFstradeatapremiumordiscountbecausecapitalmarketsofthehomeandhostcountriesaresegmented,preventingcross-borderarbitrage.Ifcross-borderarbitrageispossible,CECFsshouldbetradingneartheirnetassetvalues.

10.Whydoinvestorsinvestthelion’sshareoftheirfundsindomesticsecurities?

Answer:

Investorsinvestheavilyintheirdomesticsecuritiesbecausetherearesignificantbarrierstoinvestingoverseas.Thebarriersmayincludeexcessivetransactioncosts,informationcostsforforeignsecurities,legalandinstitutionalrestrictions,extrataxes,exchangeriskandpoliticalriskassociatedwithoverseasinvestments,etc.

11.Whataretheadvantagesofinvestingviainternationalmutualfunds?

Answer:

Theadvantagesofinvestingviainternationalmutualfundsinclude:

（1）savetransaction/informationcosts,

（2）circumventlegal/institutionalbarriers,and（3）benefitfromtheexpertiseofprofessionalfundmanagers.

12.Discusshowtheadventoftheeurowouldaffectinternationaldiversificationstrategies.

Answer:

Astheeuro-zonewillhavethesamemonetaryandexchange-ratepolicies,thecorrelationsamongeuro-zonemarketsarelikelytogoup.Thiswillreducediversificationbenefits.However,totheextentthattheadoptionofeurostrengthenstheEuropeaneconomy,investorsmaybenefitfromenhancedreturns.

PROBLEMS

1.Supposeyouareaeuro-basedinvestorwhojustsoldMicrosoftsharesthatyouhadboughtsixmonthsago.Youhadinvested10,000eurostobuyMicrosoftsharesfor$120pershare;theexchangeratewas$1.15pereuro.Yousoldthestockfor$135pershareandconvertedthedollarproceedsintoeuroattheexchangerateof$1.06pereuro.First,determinetheprofitfromthisinvestmentineuroterms.Second,computetherateofreturnonyourinvestmentineuroterms.Howmuchofthereturnisduetotheexchangeratemovement?

Solution:

Itisusefulfirsttocomputetherateofreturnineuroterms:

C

Thisindicatesthatthiseuro-basedinvestorbenefitedfromanappreciationofdollaragainsttheeuro,aswellasfromanappreciationofthedollarvalueofMicrosoftshares.TheprofitineurotermsisaboutC2,100,andtherateofreturnisabout21%ineuroterms,ofwhich8.5%isduetotheexchangeratemovement.

2.Mr.JamesK.Silber,anavidinternationalinvestor,justsoldashareofNestlé,aSwissfirm,forSF5,080.ThesharewasboughtforSF4,600ayearago.TheexchangerateisSF1.60perU.S.dollarnowandwasSF1.78perdollarayearago.Mr.SilberreceivedSF120asacashdividendimmediatelybeforethesharewassold.ComputetherateofreturnonthisinvestmentintermsofU.S.dollars.

Solution:

Mr.Silbermusthavepaid$2,584.27（=4,600/1.78）forashareofNéstleayearago.Whenthesharewasliquidated,hemusthavereceived$3,250[=（5,080+120）/1.60].Therefore,therateofreturnindollartermsis:

R（$）=[（3,250-2,584.27）/2584.27]x100=25.76%.

3.Intheaboveproblem,supposethatMr.SilbersoldSF4,600,hisprincipalinvestmentamount,forwardattheforwardexchangerateofSF1.62perdollar.HowwouldthisaffectthedollarrateofreturnonthisSwissstockinvestment?

Inhindsight,shouldMr.SilberhavesoldtheSwissfrancamountforwardornot?

Whyorwhynot?

Solution:

ThedollarprofitfromsellingSF4,600forwardisequalto:

Profit（$）=4,600（1/1.62–1/1.60）

=4,600（0.6173–0.625）

=-$35.42.

Thus,thetotalreturnofinvestmentis:

R（$）=[（3,250-2,584.27-35.42）/2584.27]x100=24.39%.

By‘hindsight’,Mr.SilbershouldnothavesoldtheSFamountforwardasitreducedthereturnindollarterms.

4.JapanLifeInsuranceCompanyinvested$10,000,000inpure-discountU.S.bondsinMay1995whentheexchangeratewas80yenperdollar.Thecompanyliquidatedtheinvestmentoneyearlaterfor$10,650,000.Theexchangerateturnedouttobe110yenperdollaratthetimeofliquidation.WhatrateofreturndidJapanLiferealizeonthisinvestmentinyenterms?

Solution:

JapanLifeInsuranceCompanyspent¥800,000,000tobuy$10,000,000thatwasinvestedinU.S.bonds.Theliquidationvalueofthisinvestmentis¥1,171,500,000,whichisobtainedfrommultiplying$10,650,000by¥110/$.Therateofreturnintermsofyenis:

[（¥1,171,500,000-¥800,000,000）/¥800,000,000]x100=46.44%.

5.Atthestartof1996,theannualinterestratewas6percentintheUnitedStatesand2.8percentinJapan.Theexchangeratewas95yenperdollaratthetime.Mr.Jorus,whoisthemanagerofaBermuda-basedhedgefund,thoughtthatthesubstantialinterestadvantageassociatedwithinvestingintheUnitedStatesrelativetoinvestinginJapanwasnotlikelytobeoffsetbythedeclineofthedollaragainsttheyen.HethusconcludedthatitmightbeagoodideatoborrowinJapanandinvestintheUnitedStates.Atthestartof1996,infact,heborrowed¥1,000millionforoneyearandinvestedintheUnitedStates.Attheendof1996,theexchangeratebecame105yenperdollar.HowmuchprofitdidMr.Jorusmakeindollarterms?

Solution:

LetusfirstcomputethematurityvalueofU.S.investment:

（¥1,000,000,000/95）（1.06）=$11,157,895.

Thedollaramountnecessarytopayoffyenloanis:

（¥1,000,000,000）（1.028）/105=$9,790,476.

Thedollarprofit=$11,157,895-$9,790,476=$1,367,419.

Mr.JoruswasabletorealizealargedollarprofitbecausetheinterestratewashigherintheU.S.than