If domestic and foreign currency bonds are perfect substitutes and investors’ preferences change such that they...

If domestic and foreign currency bonds are perfect substitutes and investors’ preferences change such that they want to hold more foreign currency bonds how does this impact the risk premium on domestic bonds? Does a floating or fixed exchange rate minimize the impact on output and why?

Expert Solution

FCCB are issued in currencies different from the issueing company's domestic currency.

Corporate issue FCCBs to raise money in foreign currencies. These bonds retain all featuresof a convertible bond, making them very attractive to both investors and the issuers.
If a investor holds more FCCBs than domestic currency bonds, it meanshe/she is retaining more no of foreign currencies with him. This can impact the volatility of domestic currency.
one of the point is inflation if it changes and fluctuation in foreign currencie increases as compare to foreign currency, then in future he/she can will be very beneficial. At that time he will be rich and it might happen reverse if domestic currency increases and foreign currency decreases.
Hence fluctuation in foreign as well as domestic currencie affect share market because these are all subject to market risk.
The fixed exchange rate doesnot affect it ,if it is initial foreign currency would be.
And fluctuating currency always affect if it is domestic currency or foreign currency.

jeff jeffy answered 2 years ago

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