Chapter 11: Overseas markets

Question 1

Reasons for overseas investments (3)

Answer 1

1. Match liabilities in a foreign currency
   - If liabilities are not matched in currency, exposed to the risk of adverse currency movements
2. Increased expected return
   - Return overseas can be better (higher risk or undervalued market -> emerging markets)
   - Long-run returns in major markets tend to be the same
3. Diversification
   - Investing in currencies/economies with low correlation
   - Invest in industries not available in the domestic country
4. Opportunities
5. Ethical reasons, need to be met

Question 2

Disadvantages of investing overseas

MTV CATERPILLAR

Answer 2

M - Mismatching assets and liabilities
T - Tax issues
V - Volatility of returns (currency movements but this can be hedged against)

C - Custodian may be required in holding a foreign asset
A - Additional administration
T - Time delays, communication and payment issues
E - Expertise required in foreign country (extra expense)
R - Regulation might be poor
P - Political changes - adverse
I - Information - less available or unfamiliar format
L - Liquidity lower (smaller or less participants to trade with)
L - Language barriers
A - Accounting practices differ
R - Restriction on ownership of certain assets

Question 3

Name four ways to gain access to overseas markets

Answer 3

1. invest in the multinational country based in the domestic country
   - Easy investment
   - Expertise in overseas markets (they will invest in the profitable areas)
   - Overseas earnings are diluted by domestic earnings
   - No investment control on where the company invest
   - Effectively a domestic company, so shares are expected to move in line with domestic market
2. Invest in domestic companies with large amount of export trade
3. Collective investment schemes specialising in overseas investmetn
4. Derivatives based on overseas assets

Question 4

Drawbacks of investing in emerging markets

Answer 4

1. Volatility: Influenced by large inflows/outflows of money
2. Regulation: Possibly more fraud/insiders trading
3. Political instability
4. Struggling to repatriate funds