FINC495 Week 7 Assignment 7

Instructions

Complete the following questions and submit your answers to the Dropbox by midnight Sunday:

• Chapter 15, Pg 391 Questions 1-6
• Chapter 15, Pg 392 Problems 1-4
• Chapter 16, Pg 426 Questions 1-8

 

Chapter 15

Question 1

What factors are responsible for the recent surge in international portfolio investment?

 

Question 2

Security returns are found to be less correlated across countries than within a country. Why can this be?

 

Question 3

Explain the concept of the world beta of a security.

 

Question 4

Explain the concept of the Sharpe performance measure.

 

Question 5

Explain how exchange rate fluctuations affect the return from a foreign market measured in dollar terms. Discuss the empirical evidence on the effect of  exchange rate uncertainty on the risk of foreign  investment.

 

Question 6

Would exchange rate changes always increase the risk of foreign investment? Discuss the condition under which exchange rate changes may actually reduce the risk of foreign investment.

 

Problem 1

Suppose you are a euro-based investor who just sold Microsoft shares that you had bought six months ago. You had invested 10,000 euros to buy Microsoft shares for $120 per share; the exchange rate was $1.15 per euro. You sold the stock for $135 per share and converted the dollar proceeds into euro at the exchange rate of $1.06 per euro. First, determine the profit from this investment in euro terms. Second, compute the rate of return on your investment in euro terms. How much of the return is due to the exchange rate movement?

 

Problem 2

Mr. James K. Silber, an avid international investor, just sold a share of Nestlé, a Swiss firm, for

SF5,080. The share was bought for SF4,600 a year ago. The exchange rate is SF1.60 per U.S. dollar now

and was SF1.78 per dollar a year ago. Mr. Silber received SF120 as a cash dividend immediately before

the share was sold. Compute the rate of return on this investment in terms of U.S. dollars.

 

 

Problem 3

 

In the above problem, suppose that Mr. Silber sold SF4,600, his principal investment amount, forward

at the forward exchange rate of SF1.62 per dollar. How would this affect the dollar rate of return on this

Swiss stock investment? In hindsight, should Mr. Silber have sold the Swiss franc amount forward or not?

Why or why not?

 

 

Problem 4

Japan Life Insurance Company invested $10,000,000 in pure-discount U.S. bonds in  May 1995 when the exchange rate was 80 yen per dollar. The company liquidated the investment one year later for $10,650,000. The exchange rate turned out to be 110 yen per dollar at the time of liquidation. What rate of return did Japan Life realize on this investment in yen terms?

 

Chapter 16

Question 1

Recently, many foreign firms from both developed and developing countries acquired high-tech U.S.

firms. What might have motivated these firms to acquire U.S. firms?

 

Question 2

 

Japanese MNCs, such as Toyota, Toshiba, Matsushita, etc., made extensive investments in the

Southeast Asian countries like Thailand, Malaysia and Indonesia. In your opinion, what forces are driving

Japanese investments in the region?

 

 

Question 3

Since the NAFTA was established, many Asian firms especially those from Japan and Korea made

extensive investments in Mexico. Why do you think these Asian firms decided to build production

facilities in Mexico?

 

Question 4

How would you explain the fact that China emerged as the second most important recipient of FDI

after the United States in recent years?

 

Question 5

Explain the internalization theory of FDI. What are the strength and weakness of the theory?

 

Question 6

Explain Vernon's product life-cycle theory of FDI. What are the strength and weakness of the theory?

 

Question 7

Why do you think the host country tends to resist cross-border acquisitions, rather than greenfield

investments?

 

 Question 8

How would you incorporate political risk into the capital budgeting process of foreign investment

projects?