CHAPTER TWENTY-FIVE

1. CHAPTER TWENTY-FIVE INTERNATIONAL INVESTING

2. THE TOTAL INVESTABLE INTERNTATIONAL CAPITAL MARKET PORTFOLIO • GLOBAL DISTRIBUTION OF CAPITAL (by market in trillions of US$) • Non-U.S. Bond & Equity Markets =$25 • Total World Portfolio = 49.1 • Fixed Income securities = 25.9

3. THE TOTAL INVESTABLE INTERNTATIONAL CAPITAL MARKET PORTFOLIO • GLOBAL DISTRIBUTION OF CAPITAL (by country in trillions of US$) • Largest Market for common stock = U.S. • U.S & Japanese Assets as %Total = 63.4% • U.S.,Japan, Germany,UK, France =82.9%

4. THE TOTAL INVESTABLE INTERNTATIONAL CAPITAL MARKET PORTFOLIO • GLOBAL EQUITY INDICES • MOST CLOSELY WATCHED: • FTSE100 • NIKKEI225 • TSE 300

5. THE TOTAL INVESTABLE INTERNTATIONAL CAPITAL MARKET PORTFOLIO • INTERNATIONAL • EAFE (Morgan Stanley) • IFC (International Finance Corporation)

6. THE TOTAL INVESTABLE INTERNTATIONAL CAPITAL MARKET PORTFOLIO • EMERGING MARKETS • COMMON FEATURES: • securities improved political and economic stability • available to foreign ownership • convertible currency • relatively low level of per capita GDP

7. THE TOTAL INVESTABLE INTERNTATIONAL CAPITAL MARKET PORTFOLIO • EMERGING MARKET INDICES • Morgan Stanley • IFC: Emerging Market Index, national

8. RISK AND RETURN FROM FOREIGN INVESTING • THE ADDITIONAL RISKS • POLITICAL RISK • DEFINITION:refers to the uncertainty about the ability of an investor to convert foreign currency into local

9. RISK AND RETURN FROM FOREIGN INVESTING • THE ADDITIONAL RISKS • EXCHANGE RATE RISK • DEFINITION:refers to uncertainty about the rate at which a foreign currency can be exchanged for the investor’s local currency in the future

10. RISK AND RETURN FROM FOREIGN INVESTING • MANAGING EXCHANGE RATE RISK • involves using hedge instruments such as • currency forward contracts • currency options • currency futures

11. RISK AND RETURN FROM FOREIGN INVESTING • MANAGING EXCHANGE RATE RISK • TWO APPROACHES: • passive currency management

12. RISK AND RETURN FROM FOREIGN INVESTING • MANAGING EXCHANGE RATE RISK • TWO APPROACHES: • active currency management

13. RISK AND RETURN FROM FOREIGN INVESTING • passive currency management • involves a strategy of permanently controlling a portfolio’s exposure to risk

14. RISK AND RETURN FROM FOREIGN INVESTING • active currency management • involves a strategy of frequently changing currency exposures to take advantage of perceived short-run mispricings

15. FOREIGN AND DOMESTIC RETURNS • THE DOMESTIC RETURN • FORMULA

16. FOREIGN AND DOMESTIC RETURNS • THE FOREIGN RETURN • FORMULA

17. FOREIGN AND DOMESTIC RETURNS • FOREIGN INVESTMENT • Two Parts: • the investment in the country’s firm(s) • the currency exposure

18. FOREIGN AND DOMESTIC RETURNS • Calculating the return on foreign currency

19. FOREIGN AND DOMESTIC RETURNS we know and

20. FOREIGN AND DOMESTIC RETURNS • Calculating the return on foreign currency • the return on a foreign security ( rF ) can be estimated by summing the domestic with the currency returns

21. EXPECTED RETURNS • ON A FOREIGN SECURITY • FORMULA • If expected return differential exists, interest rate parity equates the two rates

22. EXPECTED RETURNS • ON A FOREIGN SECURITY: An Example Assume an investor can buy either a 5% U.S. Treasury bond or a 7% German bond, which gives a better return? If the German mark is expected to depreciate by 2% against the U.S.$, neither bond offers a better return

23. FOREIGN AND DOMESTIC RISK • Calculating Portfolio Risk • Formula: where sF= the risk of the foreign portfolio sD = the risk of the foreign stock sC = the risk of the foreign currency rDC= the correlation between the currency change and the asset returns

24. FOREIGN AND DOMESTIC RISK • PORTFOLIO RISK • the smaller the value of the correlation coefficient, the lower the foreign portfolio risk

25. END OF CHAPTER 25