Reading 66: International Asset PricingLOS a: 习题精选 2010, management, president, mobility, capital

honeycfa

LOS a: Explain international market integration and segmentation and the impediments to international capital mobility.

Gerald Santana, CFA is the president and CEO of Dartmouth Ltd., a hedge fund management firm located in New York. The firm has been in existence for nearly fifteen years, and has shown consistently impressive returns since inception. Dartmouth has a wide variety of investments across a broad range of asset types that are based around the world. Members of the firm have a great deal of experience in assessing the currency exposure associated with investing in international markets. Due to a recent influx of new funds, Santana and his team have a substantial amount of uninvested cash and are currently evaluating several investment opportunities.

One potential investment for the fund is a 25 percent stake in a closely-held manufacturing company located in Ireland which produces textiles for export to the United States. Prices are set and paid for in U.S. dollars, but all costs of production are incurred in Euros. Santana is somewhat concerned about the potential currency exposure of the company, although he is quite familiar with the risks involved with investing in foreign firms with multinational operations. He intends to do further analysis of expected returns given various anticipated interest rate and exchange rate scenarios.

Additionally, Santana is considering placing some interim funds in some British bonds that appear cheap and are currently yielding a premium over other country’s comparable securities. In his opinion, inflation rates should remain reasonably stable over the next year and the real exchange rate between the two countries is expected to remain constant. The securities are highly liquid, so he does not anticipate any problem selling the bonds should he decide to liquidate the position prior to his anticipated one-year holding period.

Current spot rates:

• U.S. Dollar ($) per Euro (

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honeycfa

If the international markets are segmented, which of the following is TRUE?

A) The international capital asset pricing model will still be valid.

B) The extended capital asset pricing model must be used to price international assets.

C) Risk will not be priced the same in all markets.

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If markets are segmented, then assets with similar risk/return parameters will not necessarily be priced the same.

honeycfa

Suppose that all individual national economies and markets are efficient. If the national economies are efficient, then:

A) the international market can still be inefficient.

B) the international market must be efficient.

C) the international capital asset pricing model must be valid.

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It is possible for the individual national markets to be efficient and for the international market to still be segmented and inefficient.

honeycfa

Suppose that international capital mobility is limited by the existence of discriminatory taxes and higher transaction costs. If these barriers are present, then which of the following is TRUE?

A) The international markets must be inefficient.

B) The international markets will not be integrated.

C) The international markets can still be integrated.

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International market integration does not require that all barriers to international capital mobility be eliminated. Integration only requires that sufficient capital flows exist to force efficient pricing of risk.

honeycfa

Which of the following is NOT an impediment to international capital mobility?

A) Psychological barriers.

B) Discriminatory taxation.

C) Model risk.

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The impediments to international capital mobility do not include model risk. Model risk exists in all markets.

honeycfa

Which of the following is considered an impediment to international capital mobility?

A) Greek risk.

B) Market risk.

C) Foreign currency risk.

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Foreign currency risk is an impediment to international capital mobility. The other risks listed exist in any market, domestic or international (note: Greek risk refers to derivative securities models).

honeycfa

John Swanson is an economic advisor for the international division of BMC Investments. He has been asked to gather economic data and present a seminar to other analysts regarding international economic concerns. The following three issues were raised in the seminar. Choose the most reasonable statement that Swanson should make in replying to the questions raised.

The issue of growth rates across various countries was discussed and there was some disagreement regarding future expectations for growth rates across countries. Which of the following statements most accurately describe expectations of future growth rates under neoclassical theory?

A) The best method for measuring the difference in growth rates internationally is using endogenous growth theory.

B) Conditional convergence is predicted for countries with similar economic attributes, including savings and population growth rates.

C) High-growth countries that have historically made high investment for growth will ultimately enter a steady state.

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Under neoclassical theory the concept of convergence implies that high-growth countries that have historically made high investment for growth will ultimately enter a steady state. Absolute convergence, not conditional convergence, is predicted for countries with similar economic attributes, including savings and population growth rates. There is empirical evidence to suggest that countries that invest more will grow faster, but the accelerated growth is not permanent. Endogenous (new) growth theory is not of much value in explaining differences in growth rates internationally.

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The vice president of equity analysis believes that Japan is an integrated world market with few impediments to international flow of capital. Which of the following factors would NOT cause Swanson to question the international efficiency of Japan?

A) Foreign currency risk is not completely hedged away.

B) The accounting system in Japan is not in accordance with Generally Accepted Accounting Principles (GAAP).

C) The gross domestic product (GDP) is less for Japan than the local GDP.

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The level of GDP is not a factor in questioning the international efficiency of a country. In addition to the other factors mentioned in this question, there are several other impediments to international flow of capital. The six potential impediments to international flow of capital are psychological barriers, legal restrictions, transaction cost, discriminatory taxation, political risks, and foreign currency risk.

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Swanson has reason to believe that Japan will soon be making monetary policy changes that will cause the yen to suddenly depreciate 1%. If the value of a Japanese firm falls when the yen depreciates, the asset return and currency movement are:

A) positively correlated from a U.S. investor's perspective which exaggerates the currency movement impact.

B) negatively correlated from a U.S. investor's perspective which exaggerates the currency movement impact.

C) positively correlated from a U.S. investor's perspective which lessens the currency movement impact.

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If the value of a Japanese firm falls when the yen depreciates, the asset return and currency movement are positively correlated from a U.S. investor’s perspective, and this exaggerates the currency movement impact.