1. Describe three ways an unstable exchange rate will influence the return on an
ID: 2748731 • Letter: 1
Question
1. Describe three ways an unstable exchange rate will influence the return on an internationally diversified portfolio.
2. Describe the home “home bias” in international investing. Briefly explain the four possible cause of home bias.
3. Briefly explain the six ways cross-listing lowers the cost of capital.
4. Briefly explain the four barriers to cross-listing.
5. Describe how the Adjusted Present Value Model differs from the basic Net Present Value Model. How does the differences made the APV Model better for evaluating international projects of MNC.
6. Briefly describe how a “currency swap” is implemented.
Explanation / Answer
1.
2. The term "Home Bias" can be defined as the investors tendency to invest in large amount of domestic equities,overlooking purported benefits of diversifying in foreign equities.
Four possible causes of home bias could be the following:
a. Discrimination against foreign equity investors by direct costs such as withholding taxes.
b. Restrictions based on domestic investors to hold domestic equities.
c. Returns to domestic equities best match target characteristics of the investors portfolio.
d. Percieved or real differences in the information or beliefs possessed by domestic or foreign investors.
3. Cross Listing lowers cost of capital in following ways:
a. improvement of the firm’s information environment.
b. Company's shares become more accessible to global investors whose access would otherwise be restricted because of international investment barriers.
c. Cross-listings on deeper and more liquid equity markets could lead to an increase in the liquidity of the stock and a decrease in the cost of capital.
4. Following are the barriers to cross listing:
a. It will be subject to the corporate governance laws and regulations applicable in the US, which imposes more stringent disclosure requirements.
b. It will be subject to the analysis of financial institutions like underwriters, auditors, valuers and/or debt rating agencies. This will of course be coincided with high level of disclosure requirements.
c. It will be subject to increased securities analysis, which means that future income forecasts will be calculated more accurately.
d. Hence, companies should consider and take into account all the implications which are associated with their decision to cross-list their shares on one of the well-developed stock markets.
This would include stringent disclosure requirements, abiding by takeover rules, applying well advanced corporate governance rules and the costs that will be associated with the application of these rules, separation between ownership and management etc.
5. Adjusted Present Value is defined as The Net Present Value (NPV) of a project if financed solely by equity plus the Present Value (PV) of any financing benefits (the additional effects of debt).
6. Currency swaps are an essential financial instrument utilized by banks, multinational corporations and institutional investors.A currency swap involves two parties that exchange a notional principal with one another in order to gain exposure to a desired currency. Following the initial notional exchange, periodic cash flows are exchanged in the appropriate currency.
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