Question

According to Eun and Resnick’s “International Financial Management,” when investors control exchange rate risk by using currency forward contracts,

A.           they can substantially enhance the efficiency of international stock portfolios.

B.           they can substantially enhance the efficiency of international bond portfolios.

C.           the risk of investing in foreign stock markets can be completely hedged.

D.           both a and b

With regard to the Optimal International Portfolio (OIP),

A. the composition of the optimal international portfolio is identical for all investors, regardless of home country.

B. the OIP has more return and less risk for all investors, regardless of home country.

C. the composition of the optimal international portfolio is identical for all investors, regardless of home country, if they hedge their risk with currency futures contracts.

D. none of the above

Studies show that international stock markets tend to move more closely together when the volatility is higher. This finding suggests that

A.           investors should liquidate their portfolio holdings during turbulent periods.

B.           since investors need risk diversification most precisely when markets are turbulent, there may be less benefit to international diversification for investors who liquidate their portfolio holdings during turbulent periods.

C.           this kind of correlation is why international portfolio diversification is smart for today's investor.

D.           none of the above

Answer 1

1. ) C.)) The risk of investing in foreign stock markets can be completely hedged.

foreign currency futures contracts have standard contract sizes, time periods, settlement procedures and are traded on regulated exchanges throughout the world.

Suppose forward contract to sell a currency, the seller sets a future exchange rate with no upfront cost.The risk of market completely hedged by diversifying the stocks market.

2.) D.)) None of the above

The composition of the Optimal International Portfolio are varies depending upon the numerative currency used to measure returns.

An international portfolio is a grouping of investment assets that focuses on securities from foreign markets rather than domestic ones. An international portfolio is designed to give the investor exposure to growth in emerging and developed markets and provide diversification.

3. B.) Since investors need risk diversification most precisely when markets are turbulent, there may be less benefit to international diversification for investors who liquidate their portfolio holdings during turbulent periods.

Diversification is a way to try to reduce the risk of your portfolio by choosing a mix of investments.

investors can get more diversification with shares of foreign, small-cap stocks.Each and every investor evaluates market and economic conditions, and places their capital in the investment vehicle that appears to offer the best return for the risk taken.