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Risk-Free Home Currency Asset as an Investment Benchmark
A global investor always has the option to invest in a risk-free asset denominated in their home currency. This asset, such as a government bond or a government-guaranteed bank deposit, serves as a benchmark against which the returns from foreign investments are compared.
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Risk-Free Home Currency Asset as an Investment Benchmark
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Global Investment Decision Scenario
An investor based in the United States is considering two one-year investment options. They can earn a 4% annual return on a domestic government bond. Alternatively, they can invest in a government bond from a developing country that offers a 12% annual return. The investor expects the developing country's currency to depreciate by 10% against the US dollar over the year. Based solely on these expected returns, which investment should the investor choose and why?
Evaluating an International Investment Strategy
Critique of a Global Investment Strategy
In a world with no capital controls, a rational investor seeking to maximize returns should always invest in the country offering the highest nominal interest rate, as this guarantees the highest return when converted back to their home currency.
A global investor based in Japan is comparing a 1-year Japanese government bond with a 1-year U.S. government bond. To make a rational decision about which asset offers a better return, which of the following pieces of information is MOST essential, in addition to the interest rates on both bonds?
An investor from a country with a 2% domestic interest rate decides to invest for one year in a foreign country's bonds that offer a 10% interest rate. At the end of the year, after converting the foreign currency back to their home currency, the investor discovers they have earned a negative overall return. Which of the following is the most plausible explanation for this outcome?
Inferring Exchange Rate Expectations
Evaluating Competing Foreign Investment Opportunities
Evaluating an Investment Strategy Based on High Nominal Interest Rates
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Foreign Policy Rate (i*)
An investor based in Australia is considering purchasing corporate bonds issued by a company in the United Kingdom. To decide if this foreign investment is worthwhile, the investor needs a fundamental baseline for comparison. Which of the following represents the most appropriate benchmark for this Australian investor?
Critique of the Universal Investment Benchmark
Global Investment Decision Benchmark
Rationale for the Home Currency Benchmark
A Canadian investor is evaluating an investment in a German technology startup. To determine the minimum acceptable return, the investor should use the interest rate on a German government bond as their primary benchmark.
An international investment firm employs analysts from various countries. For each analyst evaluating a potential foreign investment, match them with the most appropriate risk-free benchmark they should use for their comparison.
A French investor determines that a risk-free investment in their own country yields a 2% annual return. They are evaluating a foreign investment opportunity that, after adjusting for all relevant risks and currency fluctuations, is projected to yield 1.5%. The investor should reject this opportunity because its adjusted return is less than the return available from their __________.
An investor from South Korea is considering an investment in Brazilian government bonds. Arrange the following steps in the logical order they would follow to make a decision using their home currency's risk-free asset as a benchmark.
An investor based in Switzerland has historically found it profitable to invest in a portfolio of foreign corporate bonds, as their returns consistently exceeded the 1% yield on Swiss government bonds. Recently, the Swiss central bank increased its key interest rate, causing the yield on Swiss government bonds to rise to 4%. Assuming the expected returns and risks of the foreign bonds remain the same, what is the most likely consequence for the investor's strategy?
Evaluating an Investment Manager's Rationale