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LOS b: Distinguish between market liberalization and market integration and discuss the financial and economic changes indicative of an effective liberalization.
Q1. Jean Daniel is an emerging markets portfolio manager for a large private investment group, Lakefront Financial, based in the U.S. Laura Shrum is a junior analyst at the firm, whose responsibilities include measuring the benefits of incorporating emerging markets into a portfolio based on long-term perspectives. During a weekly firm meeting on past performance and potential changes in future firm strategy, Daniel and Shrum provide some historical perspective on the performance of emerging market equities, using data from 1980 to 2005.
Before discussing the specifics of the data, Daniel states that it is important to understand the process of economic and financial liberalization because emerging countries are increasingly using liberalization to increase foreign investment in their country which aids in the development and growth of the economy. She states that a country’s financial markets will remain segmented unless it undergoes liberalization first because foreign investors will otherwise refuse to invest in the country’s assets. Shrum states that investors are sometimes biased toward their home markets and are heavily weighted in their home country assets. This occurs, Shrum says, for various reasons including the fact that investors are often more comfortable with investments they are familiar with. Shrum says that market integration and the home country bias are related because the home country bias will prevent markets from becoming more integrated.
Providing a summary of the data, Daniel states that the risks of investing in emerging markets can be quite high. She states that the best way to measure the risk of large losses in emerging markets is to use the variance-covariance or analytical value-at-risk (VAR) measure. She states that this measures the left-tail risk that most investors are concerned with. Shrum adds that when an emerging country undergoes economic and financial liberalization, the historical data for emerging markets will contain structural breaks, which she states will make the data less useful for predictive purposes.
Discussing the risk of emerging markets in more detail, Daniel states that contagion is a particular risk in emerging countries. Contagion, she states, is evidenced by the higher correlations in emerging market stock returns during periods of crisis. In regards to the effects of liberalization on stock return risk, Shrum states that when investment restrictions are lifted after liberalization, foreign investors will be able to pull their money in and out easier. This she states, will increase speculative capital flows and the variability of stock returns will increase in the short-term after liberalization.
In addition to the changes in emerging markets already discussed, Daniel and Shrum state that other changes will occur as well. To test the new employees of Lakefront Financial, they provide the following table of data for hypothetical emerging markets. They then ask the employees to identify the newly liberalized emerging market, based solely on the change in the data for each country before and after the supposed liberalization.
|
Country |
Cost of Capital |
Exports in millions of U.S. dollars |
Inflation |
Government debt as a percent of GDP |
|
|
Before |
After |
Before |
After |
Before |
After |
Before |
After |
|
A |
24.2% |
21.5% |
$882 |
$779 |
9.1% |
13.5% |
39% |
35% |
|
B |
23.4% |
21.2% |
$595 |
$888 |
8.6% |
8.0% |
33% |
25% |
|
C |
25.8% |
28.9% |
$993 |
$818 |
9.2% |
7.5% |
42% |
45% |
Later in the day, Daniel and Shrum discuss the risk of investing in individual stocks in emerging markets. Daniel states that corporate governance can be a particular problem in emerging markets and that the enforcement of shareholder rights has been traditionally weak. She states that during emerging market crises, companies with weak corporate governance tend to suffer losses. Shrum adds that the effectiveness of a corporation’s governance can be increased by increased analyst coverage, especially when the firm is controlled by family members.
Daniel and Shrum have made an investment in the emerging country of Walenzia. Fortunately, they have found a bank that will write an over the counter options contract for the Walenzian currency, abbreviated as WP. Lakefront Financial’s position in Walenzian stocks is valued at WP 10,000,000. The option delta is 0.3 and the number of WP in one option contract is SF 31,250.
Regarding their statements concerning emerging market liberalization and integration?
Daniel Shrum
A) Incorrect Correct
B) Correct Correct
C) Correct Incorrect
Q2. Regarding their statements concerning the value-at-risk measure and structural breaks?
Daniel Shrum
A) Incorrect Correct
B) Correct Correct
C) Correct Incorrect
Q3. Regarding their statements concerning contagion and post-liberalization stock return variability in emerging countries?
Daniel Shrum
A) Correct Correct
B) Incorrect Incorrect
C) Correct Incorrect
Q4. Which of the following countries from Daniel and Shrum’s table is most likely the newly liberalized emerging market, based solely on the change in the data for each country before and after the supposed liberalization?
A) Country A.
B) Country B.
C) Country C.
Q5. Regarding their statements concerning corporate governance in emerging countries?
Daniel Shrum
A) Incorrect Incorrect
B) Correct Incorrect
C) Correct Correct
Q6. How should Lakefront Financial hedge the currency risk of the Walenzian stock position?
A) Buy 320 WP call contracts.
B) Buy 320 WP put contracts.
C) Buy 1,067 WP put contracts.
Q7. Which of the following best characterizes the relationship between market liberalization and market integration?
A) Market integration precedes market liberalization.
B) Market liberalization precedes market integration.
C) The existence of one does not guarantee the existence of the other.
Q8. Which of the following best characterizes the relationship between market liberalization and stock return volatility? After liberalization, there is evidence that return volatility:
A) increases and in the long run stock volatility should increase.
B) does not change but in the long run stock volatility should decline.
C) increases but in the long run stock volatility should decline.
Q9. Which of the following best characterizes the behavior and implications of changes in the dividend yield after liberalization? Dividend yields:
A) increase and this suggests that the cost of capital temporarily increases.
B) increase and this suggests that the cost of capital permanently declines.
C) decrease and this suggests that the cost of capital permanently declines. | 
发表于 2009-3-10 17:57
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