International finance chapter 4(国际金融英文版课件)概要1.ppt

International investment without cover Two ways to invest for a domestic investor with a principal of 1. Invest in domestic assets for a year, the investor can get (1+id) in a year. Invest in foreign assets for a year, the investor expects to get 1/e· (1+if) ·Ef in a year International investment without cover The definition and use of expected uncovered interest differential (EUD) EUD = 1/e· (1+if) · Ef - (1+id) EUD0: investing abroad EUD0: investing at home International investment without cover Definition of expected rate of appreciation Expected rate of appreciation is the proportionate difference between the expected exchange rate and current spot rate. That is EF=(Ef-e)/e Then EUD ≈ EF +(if-id) This formula shows that the net incentive to invest in domestic assets or foreign assets depends on how the expected rate of appreciation on the foreign currency compares with the difference between the interest rates. If you rearrange the formula as EUD ≈ (EF +if)-id, then you can get another interpretation of the formula. International investment without cover If an uncovered foreign financial investment is exposed to exchange rate risk, why would anyone want to invest uncovered? The expected overall return on the uncovered investment may be higher than the return that can be obtained at home (EUD is positive) The contribution of uncovered investment can lower the riskiness of the investor’s full investment portfolio because of the benefits of diversification of investments. International investment without cover Uncovered interest parity The assumption of risk neutral Uncovered interest parity means EUD=0 A currency is expected to appreciate (depreciate) by as much as its interest rate is lower (higher) than the interest rate in the other country. Which means EF ≈ id-if The expected overall uncovered return on the foreign-currency investment equals the return on the domestic currency investment. Which means EF+if ≈ id. International investment without cover Un