Exam 19: International Diversification

You are a U.S. investor who purchased British securities for 2,340 pounds one year ago when the British pound cost $1.52. No dividends were paid on the British securities in the past year. Your total return based on U.S. dollars was ________ if the value of the securities is now 2,440 pounds and the pound is worth $1.61.

Assume there is a fixed exchange rate between the Canadian and U.S. dollar. The expected return and standard deviation of return on the U.S. stock market are 18% and 15%, respectively. The expected return and standard deviation on the Canadian stock market are 13% and 20%, respectively. The covariance of returns between the U.S. and Canadian stock markets is 1.5%. If you invested 50% of your money in the Canadian stock market and 50% in the U.S. stock market, the standard deviation of return of your portfolio would be

The yield on a 1-year bill in the U.K. is 8%, and the present exchange rate is 1 pound = U.S. $1.60. If you expect the exchange rate to be 1 pound = U.S. $1.50 a year from now, the return a U.S. investor can expect to earn by investing in U.K. bills is

Suppose the 1-year risk-free rate of return in the U.S. is 4%, and the 1-year risk-free rate of return in Britain is 7%. The current exchange rate is 1 pound = U.S. $1.65. A 1-year future exchange rate of ________ for the pound would make a U.S. investor indifferent between investing in the U.S. security and investing in the British security.

The interest rate on a 1-year Canadian security is 8%. The current exchange rate is C$ = US $0.78. The 1-year forward rate is C$ = US $0.76. The return (denominated in U.S. $) that a U.S. investor can earn by investing in the Canadian security is

The present exchange rate is 1 Nigerian Niara (NGN) = U.S. $0.002896. The 1-year future rate is NGN = U.S. $0.002774. The yield on a 1-year U.S. bill is 3.2%. A yield of ________ on a 1-year Nigerian bill will make an investor indifferent between investing in the U.S. bill and the Nigerian bill (NTB).

Suppose the 1-year risk-free rate of return in the U.S. is 3.5%. The current exchange rate is 1 pound = U.S. $1.70. The 1-year forward rate is 1 pound = $1.65. What is the minimum yield on a 1-year risk-free security in Britain that would induce a U.S. investor to invest in the British security?

The possibility of experiencing a drop in revenue or an increase in cost in an international transaction due to a change in foreign exchange rates is called

________ refers to the possibility of expropriation of assets, changes in tax policy, and the possibility of restrictions on foreign exchange transactions.

The interplay between interest rate differentials and exchange rates, such that each adjusts until the foreign exchange market and the money market reach equilibrium, is called the