Reference no: EM131168199

Finance Forum Post Responses (Must be Original)

I need a 125-word reply to each of the following 4 forum post made in a finance class (MUST BE ORIGINAL):

Forum #1

Closed-end country funds can be used to diversity into exotic markets that are otherwise difficult to access. "Casual observation of the price-net asset value ratios of closed-end country funds reveals some evidence consistent with the hypothesis that international investment restrictions affect these ratios. For example, on January 13,1989, the Korea Fund's shares sold at a 65% premium relative to the fund's net asset value. South Korea is a country with tight restrictions on inward and outward investment. In contrast, on the same day the United Kingdom Fund's shares sold at a 16% discount relative to the fund's net asset value" (Bonser-Neal, Catherine1. Brauer, Greggory. Neal, Robert. Wheatley, Simon. Jun90). Being a portfolio, closed-end country funds also provide instant diversification. ADRs do not provide instant diversification; investors should form portfolios themselves. In addition, there are relatively few ADRs from emerging markets. The main disadvantage of closed-end country funds is that their share prices behave somewhat like the host country's share prices, reducing the potential diversification benefits.

Closed-end country funds trade at a premium or discount because capital markets of the home and host countries are segmented, preventing cross border arbitrage. If cross boarder arbitrage is possible, closed-end country funds should be trading near their net asset values.

References

Bonser-Neal, Catherine1. Brauer, Greggory. Neal, Robert. Wheatley, Simon. Jun90, Vol. 45 Issue 2, p523-547. 25p. International Investment Restrictions and Closed-End Country Fund Prices. Retrieved from Ashford Library: https://eds.a.ebscohost.com.proxy-library.ashford.edu/eds/detail/detail?vid=1&sid=2c444058-e9db-4e7e-a2e4-39bfbdf3dd43%40sessionmgr4006&hid=4203&bdata=JnNpdGU9ZWRzLWxpdmU%3d#db=bsh&AN=4652170

Forum #2

A closed-end country fund (CECF) is a fund that trades exclusively in the securities of one country issuing a given number of shares that are traded on the host country exchange as if it were individual stock yet not redeemable at the underlying net asset value set in the home market (Eun & Renick, 2015). On the other side you have an American depository receipt (ADR) which is a certificate of ownership issued by a U.S. bank representing multiple of foreign shares that are deposited in a U.S. Bank (2015).

A major advantage of the CECF over the ADR is the ability to make investments in a single foreign market. A second advantage would be the ability to invest into emerging markets that otherwise would not be possible for the vast majority of investors. There are of course disadvantages as well. With the CECF you essentially have all your eggs in one basket. The ADR diversifies the investment by allocating its funds in multiple foreign markets. The ADR also trades essentially like a stock and has a great many financial advantages in currency conversion (in some ways avoiding it entirely) and tax incentives. I would consider the ADR to be much lower risk than a CECF.

CECF's (similar to a bond in many ways) trade at a premium or a discount as a result of the heavy influence of the U.S. Market. These funds are substantially more sensitive to the U.S. Market than to the home market factor than their corresponding net asset values (Eun & Renick, 2015).

Reference

Eun, C., & Renick, B. (2015). International Financial Management, Seventh Edition. New York, NY:McGraw-Hill Education.

Forum #3

A swap is an agreement between two parties to exchange sequences of cash flows for a set period of time. Usually, at the time the contract is initiated, at least one of these series of cash flows is determined by a random or uncertain variable, such as an interest rate, foreign exchange rate, equity price or commodity price. Conceptually, one may view a swap as either a portfolio of forward contracts, or as a long position in one bond coupled with a short position in another bond. Unlike most standardized options and futures contracts, swaps are not exchange-traded instruments. Instead, swaps are customized contracts that are traded in the over the counter market between private parties. Firms and financial institutions dominate the swaps market, with few individuals ever participating. Because swaps occur on the OTC market, there is always the risk of a counterparty defaulting on the swap. "The new economic rationale for using currency swaps replaces the conventional international capital market segmentation rationale. As traditional barriers collapse in the wake of capital market liberalization, multinational corporations continue to use currency swaps primarily due to their economic exposure" (Goswami, Gautam. Shrikhande, Milind M. Fall/Winter2007).

Currency swaps are over the counter derivatives that serve two main purposes. First, they can be used to minimize foreign borrowing cost. Second, they could be used as tools to hedge exposure to exchange rate risk. Corporations with international exposure will often utilize these instruments for the former purpose while institutional investors will typically implement currency swaps as part of a comprehensive hedging strategy.

References

Goswami, Gautam. Shrikhande, Milind M. Fall/Winter2007, Vol. 17 Issue 2, p62-71. 10p. Economic Exposure and Currency Swaps. Retrieved from Ashford Library: https://eds.a.ebscohost.com.proxy-library.ashford.edu/eds/detail/detail?vid=1&sid=320bd3b1-ffc9-481d-889a-60f2269f9610%40sessionmgr4007&hid=4203&bdata=JnNpdGU9ZWRzLWxpdmU%3d#db=bsh&AN=32604422

Forum #4

For me the most useful concept that we have discussed in the contract is hedging/diversification. While I am sure that all of your would agree that these concepts are not new at this point in our degree program, many of us nearing the end of our academic journey, the any new avenues that have been presented in the class have been eye opening. I have gained a greater understanding of the international markets and the foreign exchange. Depending on what route I decide to take once I have concluded my military service I could very well find what I have learned to be a great foundation in my new career.

I am most interested in being a financial planner for everyday people and I doubt international finance will be a significant part of that job. However, if I take a job as an investment banker or a financial manager for wealthier individuals with more resources it is highly likely that I will employ a number of these concepts in building a well diversified portfolio that is capable of hedging against risks. In honesty, I thought that this class would be one of the less interesting ones and I was wrong. I mean just to think that the FOREX is the biggest market in the world and I barely knew anything about it at all (Eun & Renick, 2015)!

Reference

Eun, C., & Renick, B. (2015). International Financial Management, Seventh Edition. New York, NY:McGraw-Hill Education.