Chap019_New - Chapter 19 Globalization and International Investing CHAPTER 19 GLOBALIZATION AND INTERNATIONAL INVESTING 1 False Investments made in

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Chapter 19 - Globalization and International Investing CHAPTER 19 GLOBALIZATION AND INTERNATIONAL INVESTING 1. False. Investments made in a local currency have the added risk associated with exchange rates. If an investment were made in dollars, the business risk of the firm would be the only risk born by the investor. If the investment is made in the local currency, the investor takes on both business risk and exchange rate risk. 2. False. In almost all cases the statement is true, however, such diversification benefit is not assured. In those cases where there is no correlation coefficient between the international investment and the US portfolio, a diversification gain cannot be assured. In fact, should a high standard deviation security, with zero or one correlation with the US portfolio were added, the overall standard deviation of the portfolio would increase. 3. False. Evidence shows that the minimum-variance portfolio is not the efficient choice. A capitalization-weighted portfolio of world indexes is likely to produce a better risk- return trade-off than the minimum-variance portfolio. 4. True. By hedging, it is possibly to virtually eliminate exchange rate risk. The result is a set of returns based on the foreign stocks and not the currency fluctuations. 5. a. $10,000/2 = £5,000 £5,000/£40 = 125 shares b. To fill in the table, we use the relation: 1 + r(US) = [(1 + r f (UK)] 0 1 E E Price per Pound-Denominated Dollar-Denominated Return (%) for Year-End Exchange Rate Share (£) Return (%) $1.80/£ $2.00/£ $2.20/£ £35 -12.5% -21.25% -12.5% -3.75% £40 0.0% -10.00% 0.0% 10.00% £45 12.5% 1.25% 12.5% 23.75% c. The dollar-denominated return equals the pound-denominated return when the exchange rate is unchanged over the year. 6. The standard deviation of the pound-denominated return (using 3 degrees of freedom) is 10.21%. The dollar-denominated return has a standard deviation of 13.10% (using 9 degrees of freedom), greater than the pound-denominated standard deviation. This is due to the addition of exchange rate risk. 19-1
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Chapter 19 - Globalization and International Investing 7. First we calculate the dollar value of the 125 shares of stock in each scenario. Then we add the profits from the forward contract in each scenario. Price per Dollar Value of Stock at Given Exchange Rate Share (£) Exchange Rate: $1.80/£ $2.00/£ $2.20/£ £35 7,875 8,750 9,625 £40 9,000 10,000 11,000 £45 10,125 11,250 12,375 Profits on Forward Exchange: [ = 5000(2.10 – E 1 )] 1,500 500 -500 Price per Total Dollar Proceeds at Given Exchange Rate Share (£) Exchange Rate: $1.80/£ $2.00/£ $2.20/£ £35 9,375 9,250 9,125 £40 10,500 10,500 10,500 £45 11,625 11,750 11,875 Finally, calculate the dollar-denominated rate of return, recalling that the initial investment was $10,000: Price per Rate of return (%) at Given Exchange Rate Share (£) Exchange Rate: $1.80/£ $2.00/£ $2.20/£ £35 -6.25% -7.50% -8.75% £40 5.00% 5.00% 5.00% £45 16.25% 17.50% 18.75% b. The standard deviation is now 10.24%.
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This note was uploaded on 04/22/2010 for the course BUS BUS 136 taught by Professor Sukwonthomaskim during the Spring '10 term at UC Riverside.

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Chap019_New - Chapter 19 Globalization and International Investing CHAPTER 19 GLOBALIZATION AND INTERNATIONAL INVESTING 1 False Investments made in

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