Question

Does the required return on a foreign project depend on who is investing the money or on where the money is being invested? Why?

How are gains to bidding firms related to exchange rates?

Answer 1

Required return on a foreign project is dependent upon who is investing the money and where the money is being invested because it is often dependent upon the nature of the investor whether he is a aggressive investor or he is a defensive investor and it is also dependent that where the money is being invested because money can be invested into a highly risky country or highly risky project or money can also be invested into a very low risk project or very low risk oriented country.

When the aggressive investors are undertaking the foreign products,they will always be undertaking the projects which are having a higher risk and high beta along with high exposure to the currency fluctuations so they will always wanting a higher rate of return in order to compensate themselves for that risk, so they will be trying to stay aggressive in their investment approach while defensive investor will be wanting a lower rate of return because they would be exposed to a much lesser risky project so it is also the nature of the project and the nature of the investor that the required rate of return is dependent upon.

Gaines to the bidding firm is also related to the fluctuation in the exchange rate and they should be adjusted to the exchange rate fluctuation accordingly to be recorded to the books of accounts because these gaines are exposed to transaction risk as they are being undertaken into the other country and when target company is in the other country ,the bidding price has to be adjusted for the exchange rate and changes in the exchange rate will also be affecting those bidding prices, so it can be said that bidding prices gaines should also be adjusted to the foreign currencies and hence they are exposed to the exchange rate risk