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(2011-S2) - FINS3616 - Tutorial Slides - Week 09

(2011-S2) - FINS3616 - Tutorial Slides - Week 09 -...

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INTERNATIONAL BUSINESS FINANCE FINS3616 Tutorial Week 9
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CHAPTER 13 — PROBLEM 1 CHAPTER 13 PROBLEM 1 Russia suffered a currency and stock crisis in 1998 that drove the dollar value of Russian stocks down to 10% of their pre-crash value. The crash caught investors by surprise, including hedge fund managers specializing in emerging markets. One hedge fund manager was quoted as saying: “If Russia had taken over a plant belonging to General Motors, the government would have done something about it… Essentially, the Russian government has confiscated Western capital, and nobody is doing anything about it” Is the risk of a market crash in an emerging economy a political risk or a financial risk? Explain. 2 FINS3616 — Peter Kjeld Andersen
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CHAPTER 13 — PROBLEM 1 CHAPTER 13 PROBLEM 1 There is not always a clear distinction between political and financial risks. Indeed, financial risks often result from political decisions. In Russia’s case, the financial risks of investment in Russian have been acerbated by the inability of the Russian government to t bli h d f l d l ti f th d l d t establish and enforce laws and regulations for the orderly conduct of business. Organized crime and corruption have contributed to poor political Organized crime and corruption have contributed to poor political, economic, financial country risk ratings in Russia. Governments make a convenient scapegoats and this hedge fund Governments make a convenient scapegoats, and this hedge fund manager clearly holds the Russian government responsible for his losses. losses. 3 FINS3616 — Peter Kjeld Andersen
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CHAPTER 13 — PROBLEM 3 CHAPTER 13 PROBLEM 3 Suppose the systematic risk of a domestic investment is: β i = ρ iW ( σ i / σ W ), where ρ iW = 0.4 is the correlation between domestic asset returns and world market returns, σ i = 0.2 is the standard deviation of domestic asset returns, and σ W = 0.1 is the standard deviation of the world market return. A comparable foreign asset has ρ f iW = 0.3 and σ f i = 0.3. a) Is the total risk of the foreign asset more or less than that of Is the total risk of the foreign asset more or less than that of the domestic asset? b) What about the systematic risk? 4 FINS3616 — Peter Kjeld Andersen
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CHAPTER 13 — PROBLEM 3 CHAPTER 13 PROBLEM 3 a) Is the total risk of the foreign asset more or less than that of the domestic asset? More. Total risk is measured by standard deviation, and the foreign asset has the higher standard deviation. b) What about the systematic risk? β foreign ρ f ( σ f / σ ) (0 3)(0 3/0 1) 0 9 i = iW i W ) = (0.3)(0.3/0.1) = 0.9 β i domestic = ρ iW ( σ i / σ W ) = (0.4)(0.2/0.1) = 0.8. Therefore, the foreign asset also has the higher systematic risk. 5 FINS3616 — Peter Kjeld Andersen
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CHAPTER 14 — PROBLEM 1 CHAPTER 14 PROBLEM 1 You work for an Israeli company that is considering an investment in China. The investment yields after-tax Chinese Yuan cash flows (in millions) as follows: OUTLAY YEAR 1 YEAR 2 YEAR 3 -CNY 600 CNY 200 CNY 500 CNY 300 The required return for this risk class is i ILS = 15% in Israel new Shekels and 11 745% in Yuan Shekels and 11.745% in Yuan.
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