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Brailsford3eSM_Ch03

Brailsford3eSM_Ch03 - Chapter 3 The international...

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Copyright © 2006 Nelson Australia Pty Limited Chapter 3 The international investment environment Learning objectives After the completion of this chapter, you should be able to: appreciate the potential benefits provided by international investment opportunities explain the nature and impact of the globalisation of world financial markets understand the basic operation and investment possibilities in the foreign exchange market comprehend the nature of investment opportunities in international equity markets, particularly in South East Asia understand the various investment vehicles available for investment in international equity markets understand the basic operation and investment possibilities in international debt and property markets. Key points 1 International markets offer benefits to Australian investors (eg. higher returns) 2 However, associated risks include exchange rate changes and political risks. Chapter outline 3.1 Introduction 1 Since deregulation, investors have greater access to international markets. 2 Australian markets comprise less than 2% of world market value. 3 Need for Australian investors to understand foreign equity, debt and property markets. 3.2 Exchange rates 1 Express the value of one currency in terms of another. 2 Australian pricing convention is to quote the indirect cross rate. 3.3 The foreign exchange market 1 Deregulation of the Australian foreign exchange market included floating of the Australian dollar in 1983 and a prohibition on international investment being lifted in 1972. 3.4 International equity markets 1 Recent trend towards globalisation, rather than segmented domestic markets. 2 Access via direct investment, or indirectly through funds (eg. closed-end funds).
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2 Investments: Concepts and Applications Solutions Manual Copyright © 2006 Nelson Australia Pty Limited 3 Issues include time-zone differences, reliability of brokers, foreign exchange rate risk. For example, the Asian financial crisis. 3.5 International debt and property markets 1 Debt markets allow Australian companies lower cost and greater access to funds. Examples include Eurocurrency markets (short-term) and Eurobond markets (long term). 2 As with domestic property market, both direct and indirect methods of investment available. Solutions to text problems Problems and applications 1 The significant advantage provided by access to international markets is an increase in the range of investments. That is, the potential investment set is enlarged. A larger investment set increases the possible combinations of risk and expected return. In the case of Australia, less than 2 percent of the value of all world securities is attributable to Australian markets. Hence, if an Australian investor ignores the investment opportunities offered by the other markets around the world, then more than 98 percent of the world’s securities (by value) is unavailable to the investor. By expanding the investment opportunity set, an investor has a
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