Week 7
mloi01
Week7.docxWeek 7 - Assignment: Assess Risks with International Diversification
Instructions
Write an evaluation on the following: Government representatives play a key role in regulating global financial markets, financial (e.g., exchange rate), economic, and political risk factors continue to impact international capital markets. For this assignment, evaluate and compare three (3) optimization methods and models (e.g., portfolio) aimed to reduce the risks associated with international diversification. Provide detailed examples within your paper.
Support your paper with minimum of five (5) resources. In addition to these specified resources, other appropriate scholarly resources, including older articles, may be included.
Length: 5-7 pages not including title and reference pages
Your paper should demonstrate thoughtful consideration of the ideas and concepts presented in the course and provide new thoughts and insights relating directly to this topic. Your response should reflect scholarly writing and current APA standards.
International Diversification
According to Bodie, Kane, and Marcus (2014), U.S. assets are only a part of the world portfolio. International capital markets offer important opportunities for portfolio diversification with enhanced risk–return characteristics. Exchange rate risk imparts an extra source of uncertainty to investments denominated in foreign currencies. Much of that risk can be hedged in foreign exchange futures or forward markets, but a perfect hedge is not feasible unless the foreign currency rate of return is known. Several world market indexes can form a basis for passive international investing. Active international management can be partitioned into currency selection, country selection, stock selection, and cash/bond selection.
The need for converting from one currency to another in operational and financial transactions introduces an additional risk – foreign exchange risk. This risk for example may surface if a company takes in sales revenue through British Pounds, while the production of the goods sold require payments in U. S. dollars and the payments back to financial investors, including shareholders, is denominated also in U. S. dollars.
As companies seek to exchange, for example British Pounds for U. S. dollars, there becomes a risk that the exchange rate will adjust, thus leaving the company with the possibility that it will receive fewer U. S. dollars per British Pound than before the change in the exchange rate. Companies have the ability to manage this additional foreign exchange risk through derivative securities.
Review the resources listed in the Books and Resources area below to prepare for this week's assignments.
Bodie, Z., Kane, A., & Marcus, A. J. (2013). Investments New York, NY McGraw-Hill-Irwin.
Read Chapter 25
Funds, F. (2015, July 2). International diversification increasingly important [Video file].
