Question

In 1999, the United States was experiencing a fairly strong economic recovery, ahead of other nations. Fears of an overheating economy led to sudden inflationary fears for the next few years.

3 - Would you expect U.S. interest rates to rise or drop?

4 -   Would you expect the dollar to depreciate or appreciate?

5 - Would you expect a foreign bond portfolio to be a good investment compared to a U.S. dollar portfolio under this scenario?

6 - Is currency risk a barrier to international investing? Please explain.

7 - Should nominal interest rates be equal across countries? Why or why not?

8 - Explain how total portfolio risk can be decomposed in various risk exposures and indicate why risk decomposition can be a complex exercise.

9 - List and explain a couple of factors that introduce potential biases in performance and risk measurement of portfolios.

10 - What factors would influence a U.S. business firm to go overseas?

Answer 1

Answer(3): Yes, I expect U.S interest rates to rise. Fed hiked fed funds rate for commercial banks to 5.25% after 1999. Fed also raised short term interest rates to keep the inflation away.

Answer(4): Fed raises the rates to cope up with the inflation, now the dollar would appreciate in terms of other currencies.

Answer(6): Currency risk- It is the risk related to foreign exchange. One currency may appreciate or depreciate in terms of other currency. Currencies keep on fluctuating.

It is a barrier to international investment. People who invest internationally, are directly exposed to currency rate risk because domestic currency can come down or go up in terms of foreign currency. It will affect the portfolio of investors, due to fluctuations in currency, portfolio values comes down or go up. To reduce currency risk, investors can adopt hedging strategies in currency futures.

Answer(10): Factors would influence a U.S. business firm to go overseas- Are as following:

1. Companies go overseas to expand their business and to grow further.
2. Companies want to diversify the risk in business by doing business internationally.
3. Companies want to have international exposure so has to increase their revenues and profits.
4. Companies go globally to increase their market share and to beat the competitors.
5. Doing business internationally provides tax benefits to the companies.