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

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

Info iconThis preview shows pages 1–7. Sign up to view the full content.

View Full Document Right Arrow Icon
TERNATIONAL BUSINESS FINANCE INTERNATIONAL BUSINESS FINANCE FINS3616 torial Tutorial Week 9
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
HAPTER 13 — ROBLEM 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
Background image of page 2
HAPTER 13 — ROBLEM 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 establish and enforce laws and regulations for the orderly conduct of business. rganized crime and corruption have contributed to poor political Organized crime and corruption have contributed to poor political, economic, financial country risk ratings in Russia. overnments 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 sses. losses. 3 FINS3616 — Peter Kjeld Andersen
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
HAPTER 13 — ROBLEM 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 = 0.2 is the i 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. the total risk of the foreign asset more or less than that of a) Is the total risk of the foreign asset more or less than that of the domestic asset? ) hat about the systematic risk? b) What about the systematic risk? 4 FINS3616 — Peter Kjeld Andersen
Background image of page 4
HAPTER 13 — ROBLEM 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? reign (0 3)(0 3/0 1) 0 9 β i foreign = ρ iW f ( σ i f / σ 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
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
HAPTER 14 — ROBLEM 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: O U T L A Y Y E A R 1Y E A R 2Y E A R 3 -CNY 600 CNY 200 CNY 500 CNY 300 The required return for this risk class is i ILS = 15% in Israel new
Background image of page 6
Image of page 7
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/23/2012 for the course FINS 111 taught by Professor A during the Spring '12 term at Canada College.

Page1 / 26

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

This preview shows document pages 1 - 7. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online