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Investments in Foreign Financial Markets

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By now you must have understood the importance of understanding the currencies of various countries. Well, in the event that an individual is looking forward to investing in the foreign market, he or she must without fail be well acquainted with the currencies of various countries. In the event that a particular individual isn’t, then one thing is for certain that he or she will certainly not be able to succeed in the field. Hence, make sure you have a clear understanding of the previous chapters in the event that you wish to proceed with this one else you might as well end up making a complete mess. As far as this aspect is concerned, the estimation of the capital cost at the corporate level must be one of the primary objectives of the manager of a particular firm. In the event that the manager isn’t able to do so, one thing is for certain that the company certainly isn’t going to thrive. Identifying the various aspects of an investor in order to make such commitments is another thing necessary for making these investments.

Well, if you are actually looking to invest in the international market, then you must definitely stay updated as far as the various scopes for investments in the international market are concerned. This market is far more competitive and hence, the necessity of staying updating is crucial. If a firm doesn’t stay updated with the various available opportunities, then it is for certain that it will miss out on most of the opportunities and as a result the firm will not be able to expand itself into the foreign market any time soon.


Purchasing Power Parity and the Big Mac Index

If you are at a corporate level, you will definitely have a firm idea as far as purchasing a Mac index is concerned. PPP, a popular measure in the corporate financial world is often measured by referring to the current value of the Mac index. In the event that you aren’t familiar with what the Mac index actually is or aren’t updated with the latest values, then all you need to do is continue reading the chapter. The table below gives the reader a brief look at the various data as per the year 2008.

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As far as this table goes, if you go through the readings thoroughly, you ought to come across the fact that the various European nations are far more appealing as far as international opportunities are concerned. In the event that an individual is able to get into the network once, it is for certain that he or she is going to be rich in the near future. Over the years, there have been various instances where in the PPP standards have been violated. This in turn can result in devastation if not aided to immediately. Some of the major examples have been enlisted in the following table:

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25.2 A Local versus Foreign Returns and Home Bias

Before you move on with this section of the chapter, it is imperative for you to go back to chapter 16 and revise the section that discusses the idea of CAPM. In the event that you are well aware of the various aspects of CAPM, you might as well continue with this section of the chapter without going into much of a discussion as far as CAPM is concerned. The portfolio of the market is something the investors must never let go of. This is something that the CAPM has stated time and again. In the event that an investor doesn’t follow these guidelines, he or she might as well end up in bankruptcy. So, it is strongly recommended for individuals looking forward to investing in the international market to stay aware of the various aspects of the market which is only possible in the event that the investor always has the updated portfolio. The need for investing in the various foreign markets is growing as a result of the fact that it is a lot more diverse than any national market could possibly be. Hence, in the event that an individual is looking forward to making the maximum profit out of his or her investments, then he or she must without fail take a look at the various opportunities for investments as offered by the various international firms. These firms are pretty much capable of changing the outlook of an individual towards making investments, especially the European firms that offers investors with incentives unlike any other firm in this world.

A major concept that you must get clearly into your head is the idea of HOME BIAS. In the event that you wish to understand the mentality of the investors all across the globe, especially investors of the US, you must be well aware of the concept of HOME BIAS. Well, this term refers to the fact that most of the investors in today’s world aren’t very comfortable with the idea of investing in foreign countries, i.e. in countries other than their home countries. Thus the term HOME BIAS comes into play at the time of explaining the mentality of these investors so as to ensure that you understand the market a lot better. However, the opportunities are a lot more if an investor isn’t home biased. He or she might as well open up to numerous other incentives that the HOME BIAS investors will never hear of.

If you have taken a look at the statistics in recent times, then you must be well aware of the fact that minute changes in in the value of a dollar is capable of making an individual a millionaire. This is a clear marginal difference as far as the various return rates are concerned. By return rates here I am referring to the local and the foreign return rates. In the event that you wish to excel in the field, you might as well take a look at the MSCI ratings. These ratings are extremely crucial for individuals who are in the field of finance and are looking forward to exploring the foreign markets. It provides individuals with the various return rates that are offered by countries all across the globe. This ranking table enlists the various return rates on the basis of the country they belong to in comparison to a particular currency. This is an extremely important tool for individuals looking forward to succeeding in this field. The following table ought to give you some important statistics between the years 1970 to 2005. Another thing that needs to be considered at this point is the fact that the average increase in the rate of stocks is quite similar for all countries. It is only about a percent per month.

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However, as far as the various indexes are concerned, they don’t offer such a volatile nature which is often due to the amount of diversity that they need to deal with. The portfolio of the market as already mentioned is perhaps the most important tool an investor needs to carry in order to ensure that he or she is able to become successful as an investor. If however, an individual isn’t aware of the various aspects of the portfolio of a particular market, it is for certain that the investor won’t be able to stay in the field for long. Hence, as I have said time and again, if you are looking forward to investing in the foreign market, you must without fail be well acquainted with the various aspects of the foreign market. In addition to this, you must also stay updated with the latest portfolios of the market. If you follow my advice, then one thing is for certain that you are in no way going to become bankrupt. If you have gone through this book thoroughly, you ought to be well aware of the various techniques that ought to come in handy in the event that your last few investments haven’t paid off.

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25.2 B Historical International Investment Performance

Before an individual moves into the field of making investments and making huge profits out of it, it is extremely important that he or she is well aware of the past. If you are a residence of the US, you must without fail be updated as far as the historical background of US based investors in the foreign market. This will give you a brief idea as far as the dos and don’ts of this field are concerned. This is something that most individuals don’t consider to be important but in the long run, if an individual is looking forward to succeed he must without fail take into consideration the historical background of your ancestors.

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Reward: The years 1970 to 2005 were the years that the US stock market will definitely not want to look back at and the major reason behind this is the fact that it was during these years that the stock market of the United States absolutely sank to the ground. The major reason behind this is the fact that the value of dollar fell during these years. This is something that the members of the stock market of the United States had never experienced before and as a result, the investors faced heavy losses. This is something that the stock market had never experienced before and till date, such a scenario hasn’t occurred ever again.

The Risk Factor: One of the primary reasons behind the collapse of the stock market of the United States is due to the fact that the risk involved during the period went up by a considerable margin as a result the investors started demanding interest rates that were much higher than ever before. This in turn led to a scenario where in there was an acute shortage of investors even though the investors kept looking for investment opportunities. This is something that the US stock market will never want to experience again. There is also a beta value that is involved. This value is maintained by the countries other than the United States so as to keep up with the stock market of the United States. These few years saw a drastic fall in this value which was a direct reflection of the exceedingly poor status of the stock market of the United States.

Impact of Reward on the Risk involved: A major question that pops up in the mind of investors is whether or not making investments in other countries would have made any alteration as far as their very own stock market was concerned. In turn they would have demanded an extremely high return rate but there were firms in the international market that were willing to pay the high rates in return for proper investments. In order to answer this question, the investors often tend to make use of the CAPM formula which is of utmost importance as far as such a scenario is concerned. Hence, the net time you face any sort of dilemma with respect to the stock market of the US or any other country, make sure that you consider placing the various parameters in the CAPM formula. This will without a doubt play a huge role in ensuring that your investments bring home the maximum amount of profit in the long run. I have done the same for the US stock market for the years 1970 to 2005 below:

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Make sure that you consider this example thoroughly in the event that you wish to have a firm idea regarding the historical background of the stock market of the US. This is without a doubt a crucial step for individuals who make any sort of investments in the stock market at an international level.

However, as far as the representation of the stock market using the CAPM formula done above is concerned, the parameter have been placed keeping in mind the perfect market as proposed by M & M. If you are not aware of the various aspects of M & M and the manner in which they proposed the perfect world, it is extremely important for you to look back at chapter 16 that discusses all there aspects thoroughly. In such a world, the transaction costs and the taxes are not considered. However, that certainly doesn’t mean that the risk factor is nullified as irrespective of whether you follow the propositions of M & M or not, you will definitely have to be aware of the fact that the risk factor is something that cannot be ignored in any manner. In the event that you want to get to know more regarding the various parameters of risks involved and the manner in which these parameters effect the CAPM formula and the stock market, all you need to do is go back to chapter 16 where all these parameters have been discussed in details.

To know more, you might as well consider the example as aliquoted by M & M in the press conference. They took up the example of a farmer who sells milk in order to make a living. If the farmer sells the whole milk as it is, then he definitely makes some profit. However, in the event that the farmer separates the cream from the milk and sells it separately and the skim milk separately, he ought to figure out that the profit earned in both the cases is the same making an assumption that the cost for separating the cream from the milk is zero. This is due to the fact that the skim milk will sell at a price much lower than the price of the whole milk whereas the cream will sell at a much higher price. Hence, the average profit that the farmer ought to make is more or less the same if you follow the assumptions made by M & M. These assumptions are made so as to make the student understand the topics in a lot simpler manner. However, as long as the risk involved is not more than forty percent, then the risk free world similar to that proposed by M & M is quite similar to the real world. Hence, the ideal scenarios indeed play a huge role as far as making a student understand a particular subject better is concerned. In the event that you still fail to understand the world or are unable to frame a picture of the world proposed by M & M, do consult chapter 16. All your doubts and queries will definitely be answered.

Another market that individuals in this field must be well aware of is the equity market of the OECD countries. These are one of the most popular stock markets in the world and why won’t they be? The benefits that the investors received from investing in these markets was way better than what one would ordinarily receive from investing in the stock market of other countries. As a result, more and more individuals are considering the idea of investing in these markets as the benefits one receives is truly unbelievable. Hence, in the event that you are looking forward to investing in the various stock markets, make sure that you consider the stock market of the OECD countries as well. The expected return rates that these markets have to offer are truly unbelievable. If you wish to take a more risky approach, you might as well consider the idea of investing in the stock market of the various developing countries. Though this is quite a risky affair, however, if things go your way, you might as well be looking at millions of dollars from a comparatively small investment.


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