Given an investor in Europe, with a EUR denominated portfolio base currency, that has invested in...

Given an investor in Europe, with a EUR denominated portfolio base currency, that has invested in a USD denominated corporate bond issued by a firm in Japan, identify the types of risk exposures to the investor. Would there by any additional/changed exposures if the issuing firm had a poor credit rating? Why or why not?

Expert Solution

When an investor in Europe is invested into United State dollar denominated corporate Bond which are issued by the company in Japan, following would be the risk exposure-

A. He would be exposed to the currency fluctuation of United States dollar along with European euros.

B. He will also beexposed to a lot of interest rate risk along with inflation risk in Japanese economy and American economy as well

C. He will be impacted by the credit risk and default risk which are determining the payment ability of the company

D. He will also be impacted by geo political risk arising out in the Japanese economy.

Yes, if the issuing firm has a poor credit rating then there would be a high level of credit risk that will be attached to this bond and these bonds will be prone to default case of adverse economic scenarios, because the company will not be having the enough repayment ability so one should be selecting these bonds after proper analysis of the repayment ability of the company and the credit rating of the company.

jeff jeffy answered 2 years ago

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