Chapter 19 – Globalization and International Investing
CHAPTER 19
GLOBALIZATION AND INTERNATIONAL INVESTING
1. False. Investments made in a local currency have the added risk associated with
2. False. In almost all cases the statement is true, however, such diversification benefit is
not assured. In those cases where there is no correlation coefficient between the
3. False. Evidence shows that the minimum-variance portfolio is not the efficient choice.
5. a. $10,000/$2 = £5,000
£5,000/£40 = 125 shares
The investor can buy 125 shares.
b. To fill in the table, we use the relation:
6. The standard deviation of the pound-denominated return (using 3 degrees of freedom)
is 10.21%. The dollar-denominated return has a standard deviation of 13.10% (using 9
7.
a. First we calculate the dollar value of the 125 shares of stock in each scenario.
Then we add the profits from the forward contract in each scenario.
Price per
Dollar Value of Stock
at Given Exchange Rate
Share (£)
Exchange Rate:
$1.80/£
$2.00/£
$2.20/£
£35
7,875
8,750
9,625
Price per
Total Dollar Proceeds
at Given Exchange Rate
Share (£)
Exchange Rate:
$1.80/£
$2.00/£
$2.20/£
£35
9,375
9,250
Finally, calculate the dollar-denominated rate of return, recalling that the initial
investment was $10,000:
Price per
Rate of return (%)
at Given Exchange Rate
Share (£)
Exchange Rate:
$1.80/£
$2.00/£
$2.20/£
£35
–6.25%
–7.50%
–8.75%
8. Currency Selection
EAFE: [0.30 (– .10)] + (0.10 0) + (0.60 .10) = .03 or 3.0%
Manager: [0.35 (– .10)] + (0.15 0) + (0.50 .10) = .015 or 1.5%
Loss of 1.5% relative to EAFE.
Chapter 19 – Globalization and International Investing
Stock Selection
10. You can now purchase: $10,000/$1.75 = £5,714.29
11. The relationship between the spot and forward exchange rates indicates that the U.S.
12. a. Using the relationship:
03.1
b. If the forward rate is 1.53 dollars per pound, then the forward rate is overpriced. To
create an arbitrage profit, use the following strategy:
Action
Initial Cash Flow
Cash Flow at Time T
Enter a contract to sell £1.03 at a
(futures price) of F0 = $1.53
0
1.03 (1.53 – E1)
Borrow $1.50 in the U.S.
pounds and lend in the U.K. at a
3% interest rate
1.03 E1
13.
a. Lend in the U.K.
b. Borrow in the U.S.
Chapter 19 – Globalization and International Investing
The strategy will involve:
Action
Initial Cash Flow
Cash Flow at Time T
pounds, and lend in the U.K. at a
Enter a contract to sell £1.07 at a
14. See the results below.
Chapter 19 – Globalization and International Investing
CFA 1
Answer:
a. We exchange $1 million for foreign currency at the current exchange rate and
sell forward the amount of foreign currency we will accumulate 90 days from
now. For the yen investment, we initially receive:
Invest for 90 days to accumulate:
If we sell this number of yen forward at the forward exchange rate of
¥133.47/dollar, we will end up with:
b. The nearly identical results in either currency are expected and reflect the
interest-rate parity relationship. This example thus asserts that the pricing
c. The dollar-hedged rate of return on default-free government securities in Japan
is 1.5793% and in Switzerland is 1.5643%. Therefore, the 90-day interest rate
available on U.S. government securities must be between 1.5643% and
CFA 2 a. The primary rationale is the opportunity for diversification. Factors that
contribute to low correlations of stock returns across national boundaries are:
Chapter 19 – Globalization and International Investing
i. imperfect correlation of business cycles
b. Obstacles to international investing are:
i. Availability of information, including insufficient data on which to base
investment decisions. It is difficult to interpret and evaluate data that is
ii. Liquidity, in terms of the ability to buy or sell, in size and in a timely
manner, without affecting the market price. Most foreign exchanges offer
(relative to U.S. norms) limited trading, and experience greater price
c. The asset-class performance data for this particular period reveal that non-U.S.
dollar bonds provided a small incremental return advantage over U.S. dollar bonds,
but at a considerably higher level of risk. Each category of fixed income assets
Concerning the Account Performance Index, its position on the graph reveals an
aggregate outcome that is superior to the sum of its component parts. To some
extent, this is due to the beneficial effect on performance resulting from multi-
CFA 3
Answer:
The return on the Canadian bond is equal to the sum of:
Chapter 19 – Globalization and International Investing
coupon income +
gain or loss from the premium or discount in the forward rate relative to the spot
CFA 4
Answer:
a. The following arguments could be made in favor of active management:
Economic diversity: the diversity of the Otunian economy across various sectors
may offer the opportunity for the active investor to employ “top down” sector
timing strategies.
Chapter 19 – Globalization and International Investing
b. A recommendation for active management would focus on short-term inefficiencies
in, and long term prospects for, the developing Otunian markets and economy,
inefficiencies and prospects which would not generally be found in more developed
markets.