Lecture 26: Exchange Risk & Portfolio Diversification
|
|
- Clifton Stanley
- 5 years ago
- Views:
Transcription
1 Lecture 26: Exchange Risk & Portfolio Diversification Bias in the forward exchange market as a predictor of the future spot exchange rate What makes an asset risky? The gains from international diversification The portfolio balance model
2 Does the forward market offer an unbiased predictor of the future spot exchange rate? More particularly, does the forward discount equal the mathematically expected percentage change in the spot rate: (fd) t = E t Δs t+1? Given Covered Interest Parity, it is the same as the question whether the interest differential is an unbiased predictor: (i-i*) t = E t Δs t+1? So then, does the interest differential equal the mathematically expected percentage change in the spot rate?
3 Is the interest differential an unbiased predictor of the future spot exchange rate? Usual finding: No. Bias is statistically significant: (i-i*) t E t Δs t+1.. In fact, E t Δs t+1 is much closer to zero (s is a random walk). The bias supports the carry trade : One can make money, on average, going short in a low-i currency and long in a high-i currency. How can this be? One interpretation: Rational expectations fails: Δs t e E t Δs t+1 Another: Uncovered interest parity fails: i-i* t Δs t e Because a risk premium separates (i-i*) t from Δs te. In this case, riskier currencies should be the ones to pay higher returns.
4 What makes an asset risky to a portfolio investor? If uncertainty regarding the value of the currency (variance) is high. If you already holds a lot of assets in that currency. If currency is highly correlated with other assets you hold. What matters is how much risk the currency adds to your overall portfolio.
5 The gains from international diversification James Tobin: The theory of optimal portfolio diversification Don t put all your eggs in one basket. The theory was worked out for stocks in the Capital Asset Pricing Model (CAPM). Applies to all assets: bonds, equities; domestic, foreign. International markets offer a particular opportunity for diversification, because they move independently to some extent.
6 What portfolio allocation minimizes risk? Assume 2 assets (e.g., domestic & foreign), each with probability ½ of earning -1, ½ of earning +1. Variance of overall portfolio E t (overall return t+1 ) 2 Assume the 2 assets are uncorrelated. If entire portfolio allocated to 1st asset, Variance = ½ (-1) 2 + ½ (+1) 2 = 1. If entire portfolio allocated to 2 nd asset, Variance = ½ (-1) 2 + ½ (+1) 2 = 1. If portfolio is allocated half to 1st asset & half to 2nd, Variance = ¼(-1) 2 + (½)(0) 2 + ¼ (+1) 2 = ½. That s minimum-variance. Maximum diversification.
7 Standard deviation of return to portfolio Diversification lowers risk to the overall portfolio. The investor can achieve a lower level of risk by diversifying internationally.
8 Investors want to minimize risk and maximize expected return. To get them to hold assets that add risk to the portfolio, you have to offer them a higher expected return. That is why stocks pay a higher expected return than treasury bills. Do foreign assets pay a higher expected return than domestic assets?
9 Return Medium riskaversion High riskaversion Low riskaversion Placing 20% of your portfolio abroad reduces risk (diversification). After that point, the motive for going abroad is higher expected return; investors who are more risk averse won t go much further. Purely US Risk
10 Return Similarly, putting 25% of the global portfolio in emerging markets gives diversification. After that, the gain in expected return comes at the expense of higher risk. Risk
11 The Portfolio Balance Model Portfolio investors should allocate shares in their portfolios to countries assets as: - a decreasing function of the asset s risk, and - an increasing function of its expected rate of return (risk premium). Valuation effect in fx: a 1% increase in supply of $ assets (whether in the form of money or not) can be offset by a 1% depreciation, -- so that portfolio share is unchanged, and -- therefore no need to increase expected return to attract demand. One implication: As its debt grows, a deficit country will eventually experience depreciation of its currency, or its interest rate will be forced up, or both. Another implication: => FX intervention can have an effect even if sterilized.
12 Professor Jeffrey Frankel, Harvard Kennedy School
13 Appendix: Intervention in the foreign exchange market was effective in 1985, to bring down the $, represented by the G-5 agreement at the Plaza Hotel; and was effective sometimes subsequently. Since 2001, the ECB, Fed, & BoJ have intervened very little; in 2013 the G-7 agreed not to intervene, to avoid currency wars. But other floaters intervene more often, Esp., major emerging market countries,
14 Managed float ( leaning against the wind ): Turkey s central bank buys lira when it depreciates, and sells when it is appreciates. Kaushik Basu & Aristomene Varoudakis, Policy RWP 6469, World Bank, 2013, How to Move the Exchange Rate If You Must: The Diverse Practice of Foreign Exchange Intervention by Central Banks and a Proposal for Doing it Better May, p. 14
Lectures 24 & 25: Risk
Lectures 24 & 25: Risk Lecture 24: Risk Premium & Portfolio Diversification Bias in the forward exchange market as a predictor of the future spot exchange rate What makes an asset risky? The gains from
More informationComments of Exchange Rate Management and Crisis Susceptibility: A Reassessment
14TH JACQUES POLAK ANNUAL RESEARCH CONFERENCE NOVEMBER 7 8, 2013 Comments of Exchange Rate Management and Crisis Susceptibility: A Reassessment Jeffrey Frankel Harvard University Paper presented at the
More informationLectures 24 & 25: Determination of exchange rates
Lectures 24 & 25: Determination of exchange rates Building blocs - Interest rate parity - Money demand equation - Goods markets Flexible-price version: monetarist/lucas model - derivation - hyperinflation
More informationLecture 10-12: CAPM.
Lecture 10-12: CAPM. I. Reading II. Market Portfolio. III. CAPM World: Assumptions. IV. Portfolio Choice in a CAPM World. V. Minimum Variance Mathematics. VI. Individual Assets in a CAPM World. VII. Intuition
More informationM d = k ( Y - h ( i. Chapter 9 Money Demand. M d = demand for real balances, M/p (i.e., purchasing power) Positive function of income
Chapter 9 Money Demand Money Demand Equation M d = k ( Y - h ( i M d = demand for real balances, M/p (i.e., purchasing power) Positive function of income Negative function of nominal interest rate Money
More informationParity Conditions in International Finance and Currency Forecasting. Chapter 4
Parity Conditions in International Finance and Currency Forecasting Chapter 4 ١ ARBITRAGE AND THE LAW OF ONE PRICE Five Parity Conditions Result From Arbitrage Activities 1. Purchasing Power Parity (PPP)
More informationFinance and Financial Markets
Finance and Financial Markets Second Edition Keith Pilbeam palgrave macmillan Brief contents 1 The world of finance 1 2 Financial intermediation and financial markets 22 3 Financial institutions 39 4 Monetary
More informationSlides for International Finance Financial Globalization (KOM 21)
Financial Globalization (KOM 21) American University 2011-10-05 Preview International Capital Markets Gains from Trade International Capital Markets Policy constraints and international financial markets
More informationRisk and Return and Portfolio Theory
Risk and Return and Portfolio Theory Intro: Last week we learned how to calculate cash flows, now we want to learn how to discount these cash flows. This will take the next several weeks. We know discount
More informationAnswers to Concepts in Review
Answers to Concepts in Review 1. A portfolio is simply a collection of investment vehicles assembled to meet a common investment goal. An efficient portfolio is a portfolio offering the highest expected
More informationPRINCIPLES of INVESTMENTS
PRINCIPLES of INVESTMENTS Boston University MICHAItL L D\if.\N Griffith University AN UP BASU Queensland University of Technology ALEX KANT; University of California, San Diego ALAN J. AAARCU5 Boston College
More informationModels of Asset Pricing
appendix1 to chapter 5 Models of Asset Pricing In Chapter 4, we saw that the return on an asset (such as a bond) measures how much we gain from holding that asset. When we make a decision to buy an asset,
More informationChapter 5: Answers to Concepts in Review
Chapter 5: Answers to Concepts in Review 1. A portfolio is simply a collection of investment vehicles assembled to meet a common investment goal. An efficient portfolio is a portfolio offering the highest
More informationCHAPTER 5: ANSWERS TO CONCEPTS IN REVIEW
CHAPTER 5: ANSWERS TO CONCEPTS IN REVIEW 5.1 A portfolio is simply a collection of investment vehicles assembled to meet a common investment goal. An efficient portfolio is a portfolio offering the highest
More informationInvestment Management FX markets and International Portfolio Management
Investment Management FX markets and International Portfolio Management Road Map International portfolio diversification Home bias FX risk FX markets Spot and forward/futures FX rates FX parities Hedging
More informationFinancial Mathematics III Theory summary
Financial Mathematics III Theory summary Table of Contents Lecture 1... 7 1. State the objective of modern portfolio theory... 7 2. Define the return of an asset... 7 3. How is expected return defined?...
More informationPort(A,B) is a combination of two stocks, A and B, with standard deviations A and B. A,B = correlation (A,B) = 0.
Corporate Finance, Module 6: Risk, Return, and Cost of Capital Practice Problems (The attached PDF file has better formatting.) Updated: July 19, 2007 Exercise 6.1: Minimum Variance Portfolio Port(A,B)
More informationHEDGING WITH GENERALIZED BASIS RISK: Empirical Results
HEDGING WITH GENERALIZED BASIS RISK: Empirical Results 1 OUTLINE OF PRESENTATION INTRODUCTION MOTIVATION FOR THE TOPIC GOALS LITERATURE REVIEW THE MODEL THE DATA FUTURE WORK 2 INTRODUCTION Hedging is used
More informationExchange Rate Fluctuations Revised: January 7, 2012
The Global Economy Class Notes Exchange Rate Fluctuations Revised: January 7, 2012 Exchange rates (prices of foreign currency) are a central element of most international transactions. When Heineken sells
More informationECO 317 Economics of Uncertainty Fall Term 2009 Tuesday October 6 Portfolio Allocation Mean-Variance Approach
ECO 317 Economics of Uncertainty Fall Term 2009 Tuesday October 6 ortfolio Allocation Mean-Variance Approach Validity of the Mean-Variance Approach Constant absolute risk aversion (CARA): u(w ) = exp(
More informationCHAPTER 8 Risk and Rates of Return
CHAPTER 8 Risk and Rates of Return Stand-alone risk Portfolio risk Risk & return: CAPM The basic goal of the firm is to: maximize shareholder wealth! 1 Investment returns The rate of return on an investment
More informationCh. 9 Transaction Exposure. FX Exposure. FX Exposure
Ch. 9 Transaction Exposure Topics Foreign Exchange Exposure Transaction Exposure Techniques to Eliminate Transaction Exposure Limitations of Hedging FX Exposure Foreign Exchange Exposure: Measure of the
More informationModern Portfolio Theory -Markowitz Model
Modern Portfolio Theory -Markowitz Model Rahul Kumar Project Trainee, IDRBT 3 rd year student Integrated M.Sc. Mathematics & Computing IIT Kharagpur Email: rahulkumar641@gmail.com Project guide: Dr Mahil
More information(I) DEVALUATION & THE TRADE BALANCE
(I) DEVALUATION & THE TRADE BALANCE LECTURE 1: THE MARSHALL-LERNER CONDITION Primary question: What is the effect (dtb/) of a devaluation on the trade balance? Secondary question: How much must the exchange
More informationCHAPTER 7 FOREIGN EXCHANGE MARKET EFFICIENCY
CHAPTER 7 FOREIGN EXCHANGE MARKET EFFICIENCY Chapter Overview This chapter has two major parts: the introduction to the principles of market efficiency and a review of the empirical evidence on efficiency
More informationLower prices. Lower costs, esp. wages. Higher productivity. Higher quality/more desirable exports. Greater natural resources. Higher interest rates
1 Goods market Reason to Hold Currency To acquire goods and services from that country Important in... Long run (years to decades) Currency Will Appreciate If... Lower prices Lower costs, esp. wages Higher
More informationStudy Questions (with Answers) Lecture 16 Fixed Versus Floating Exchange Rates
Study Questions (with Answers) Page 1 of 5 (6) Part 1: Multiple Choice Select the best answer of those given. Study Questions (with Answers) Lecture 16 Fixed Versus Floating Exchange Rates 1. Freely floating
More informationPart I: Multiple Choice (36%) circle the correct answer
Econ 434 Professor Ickes Fall 2009 Midterm Exam II: Answer Sheet Instructions: Read the entire exam over carefully before beginning. The value of each question is given. Allocate your time efficiently
More information1) Real and Nominal exchange rates are highly positively correlated. 2) Real and nominal exchange rates are well approximated by a random walk.
Stylized Facts Most of the large industrialized countries floated their exchange rates in early 1973, after the demise of the post-war Bretton Woods system of fixed exchange rates. While there have been
More informationDepartment of Economics Spring 2005 University of California, Berkeley Econ 182. Suggested Solutions to Problem Set I
Department of Economics Spring 2005 University of California, Berkeley Econ 182 Suggested Solutions to Problem Set I 1. This question involves considering how increasing debt burdens may affect the economy.
More informationGLOSSARY Absolute form of purchasing power parity Accounting exposure Appreciation Asian dollar market Ask price
GLOSSARY Absolute form of purchasing power parity Also called the law of one price, this theory suggests that prices of two products of different countries should be equal when measured by a common currency.
More informationAdjusting discount rate for Uncertainty
Page 1 Adjusting discount rate for Uncertainty The Issue A simple approach: WACC Weighted average Cost of Capital A better approach: CAPM Capital Asset Pricing Model Massachusetts Institute of Technology
More informationMacro for SCS Nov. 29, International Trade & Finance
Macro for SCS Nov. 29, 2017 International Trade & Finance The Gains from Trade Do you believe in magic The Gains from Trade Leave the England-Portugal rivalry for the soccer field Criticism of the free
More informationOptimize Asset Performance, Manage Diversified Risks
Optimize Asset Performance, Manage Diversified Risks Yu Kam Hung RPS(GP) FHKIS FRICS MCIREA MSc Executive Committee Member in China Real Estate Chamber of Commerce Hong Kong and International Chapter 1
More informationRisk and Return. Nicole Höhling, Introduction. Definitions. Types of risk and beta
Risk and Return Nicole Höhling, 2009-09-07 Introduction Every decision regarding investments is based on the relationship between risk and return. Generally the return on an investment should be as high
More informationECON FINANCIAL ECONOMICS
ECON 337901 FINANCIAL ECONOMICS Peter Ireland Boston College April 26, 2018 These lecture notes by Peter Ireland are licensed under a Creative Commons Attribution-NonCommerical-ShareAlike 4.0 International
More informationECMC49S Midterm. Instructor: Travis NG Date: Feb 27, 2007 Duration: From 3:05pm to 5:00pm Total Marks: 100
ECMC49S Midterm Instructor: Travis NG Date: Feb 27, 2007 Duration: From 3:05pm to 5:00pm Total Marks: 100 [1] [25 marks] Decision-making under certainty (a) [10 marks] (i) State the Fisher Separation Theorem
More informationInternational Finance
Terminology International Finance Chris Edmond NYU Stern Spring 2008 Trade balance balance on merchandise trade ( goods ) balance on goods and services ( net exports ) Current account balance current account
More informationThe Effects of Responsible Investment: Financial Returns, Risk, Reduction and Impact
The Effects of Responsible Investment: Financial Returns, Risk Reduction and Impact Jonathan Harris ET Index Research Quarter 1 017 This report focuses on three key questions for responsible investors:
More informationChapter 20 (9) Financial Globalization: Opportunity and Crisis
Chapter 20 (9) Financial Globalization: Opportunity and Crisis Preview Gains from trade Portfolio diversification Players in the international capital markets Attainable policies with international capital
More informationFinancial Theory and Corporate Policy/ THIRD
Financial Theory and Corporate Policy/ THIRD EDITION THOMAS E COPELAND Professor of Finance University of California at Los Angeles Firm Consultant, Finance McKinsey & Company, Inc. J. FRED WESTON Cordner
More informationP2.T8. Risk Management & Investment Management. Jorion, Value at Risk: The New Benchmark for Managing Financial Risk, 3rd Edition.
P2.T8. Risk Management & Investment Management Jorion, Value at Risk: The New Benchmark for Managing Financial Risk, 3rd Edition. Bionic Turtle FRM Study Notes By David Harper, CFA FRM CIPM and Deepa Raju
More informationSystematic Managed Floating
Systematic Managed Floating Jeffrey Frankel Harpel Professor of Capital Formation and Growth Harvard Kennedy School, Harvard University 4 th Asian Monetary Policy Forum Singapore, 26 May, 2017 under the
More informationChapter 7. Speculation and Risk in the Foreign Exchange Market Cambridge University Press 7-1
Chapter 7 Speculation and Risk in the Foreign Exchange Market 2018 Cambridge University Press 7-1 7.1 Speculating in the Foreign Exchange Market Uncovered foreign money market investments Kevin Anthony,
More informationCHAPTER 2 RISK AND RETURN: Part I
CHAPTER 2 RISK AND RETURN: Part I (Difficulty Levels: Easy, Easy/Medium, Medium, Medium/Hard, and Hard) Please see the preface for information on the AACSB letter indicators (F, M, etc.) on the subject
More informationMathematics of Finance Final Preparation December 19. To be thoroughly prepared for the final exam, you should
Mathematics of Finance Final Preparation December 19 To be thoroughly prepared for the final exam, you should 1. know how to do the homework problems. 2. be able to provide (correct and complete!) definitions
More informationEcon 422 Eric Zivot Summer 2004 Final Exam Solutions
Econ 422 Eric Zivot Summer 2004 Final Exam Solutions This is a closed book exam. However, you are allowed one page of notes (double-sided). Answer all questions. For the numerical problems, if you make
More informationSolutions to the problems in the supplement are found at the end of the supplement
www.liontutors.com FIN 301 Exam 2 Chapter 12 Supplement Solutions to the problems in the supplement are found at the end of the supplement Chapter 12 The Capital Asset Pricing Model Risk and Return Higher
More informationControllers Guide to Multinational Financial Management Chapter 1:
Controllers Guide to Multinational Financial Management Chapter 1: The What and Why of Multinational Finance 1. Recognize some special features of a multinational corporation (MNC). 2. Distinguish the
More informationECON FINANCIAL ECONOMICS
ECON 337901 FINANCIAL ECONOMICS Peter Ireland Boston College Spring 2018 These lecture notes by Peter Ireland are licensed under a Creative Commons Attribution-NonCommerical-ShareAlike 4.0 International
More informationECON FINANCIAL ECONOMICS
ECON 337901 FINANCIAL ECONOMICS Peter Ireland Boston College Fall 2017 These lecture notes by Peter Ireland are licensed under a Creative Commons Attribution-NonCommerical-ShareAlike 4.0 International
More information16. Foreign Exchange
16. Foreign Exchange Last time we introduced two new Dealer diagrams in order to help us understand our third price of money, the exchange rate, but under the special conditions of the gold standard. In
More informationMarkowitz portfolio theory
Markowitz portfolio theory Farhad Amu, Marcus Millegård February 9, 2009 1 Introduction Optimizing a portfolio is a major area in nance. The objective is to maximize the yield and simultaneously minimize
More information2013/2014. Tick true or false: 1. "Risk aversion" implies that investors require higher expected returns on riskier than on less risky securities.
Question One: Tick true or false: 1. "Risk aversion" implies that investors require higher expected returns on riskier than on less risky securities. 2. Diversification will normally reduce the riskiness
More informationPowerPoint. to accompany. Chapter 11. Systematic Risk and the Equity Risk Premium
PowerPoint to accompany Chapter 11 Systematic Risk and the Equity Risk Premium 11.1 The Expected Return of a Portfolio While for large portfolios investors should expect to experience higher returns for
More informationLecture 3: Country Risk
Lecture 3: Country Risk 1. The portfolio-balance model with default risk. 2. Default. 3. What determines sovereign spreads? 4. Debt Sustainability Analysis (DSA). 1. The portfolio balance model applied
More informationJ B GUPTA CLASSES , Copyright: Dr JB Gupta. Chapter 4 RISK AND RETURN.
J B GUPTA CLASSES 98184931932, drjaibhagwan@gmail.com, www.jbguptaclasses.com Copyright: Dr JB Gupta Chapter 4 RISK AND RETURN Chapter Index Systematic and Unsystematic Risk Capital Asset Pricing Model
More informationChapter 2 International Financial Markets, Interest Rates and Exchange Rates
George Alogoskoufis, International Macroeconomics and Finance Chapter 2 International Financial Markets, Interest Rates and Exchange Rates This chapter examines the role and structure of international
More informationChapter 8. Markowitz Portfolio Theory. 8.1 Expected Returns and Covariance
Chapter 8 Markowitz Portfolio Theory 8.1 Expected Returns and Covariance The main question in portfolio theory is the following: Given an initial capital V (0), and opportunities (buy or sell) in N securities
More information5. CURRENCY FUNDAMENTALS
5. CURRENCY FUNDAMENTALS Review... 1 Checklist... 3 Figures Files for Homework Exercise... 1 Fundamentals Worksheet... 2 Homework 5 - U.K. Currency Fundamentals Instructions... 1 6-country_data_rates-trade-gnp_w_currfun-graphs_bpNjy_2017.xlsx/UD-
More informationMS-E2114 Investment Science Lecture 5: Mean-variance portfolio theory
MS-E2114 Investment Science Lecture 5: Mean-variance portfolio theory A. Salo, T. Seeve Systems Analysis Laboratory Department of System Analysis and Mathematics Aalto University, School of Science Overview
More informationInterest Rates and Currency Prices in a Two-Country World. Robert E. Lucas, Jr. 1982
Interest Rates and Currency Prices in a Two-Country World Robert E. Lucas, Jr. 1982 Contribution Integrates domestic and international monetary theory with financial economics to provide a complete theory
More informationMeasuring Risk. Expected value and expected return 9/4/2018. Possibilities, Probabilities and Expected Value
Chapter Five Understanding Risk Introduction Risk cannot be avoided. Everyday decisions involve financial and economic risk. How much car insurance should I buy? Should I refinance my mortgage now or later?
More informationAdvanced Risk Management
Winter 2015/2016 Advanced Risk Management Part I: Decision Theory and Risk Management Motives Lecture 4: Risk Management Motives Perfect financial markets Assumptions: no taxes no transaction costs no
More informationInternational Finance
International Finance Chapter 21 CHAPTER CHECKLIST 1. Describe a country s balance of payments accounts and explain what determines the amount of international borrowing and lending. 2. Explain how the
More informationBasic Tools of Finance (Chapter 27 in Mankiw & Taylor)
Basic Tools of Finance (Chapter 27 in Mankiw & Taylor) We have seen that the financial system coordinates saving and investment These are decisions made today that affect us in the future But the future
More informationRisk and Return. CA Final Paper 2 Strategic Financial Management Chapter 7. Dr. Amit Bagga Phd.,FCA,AICWA,Mcom.
Risk and Return CA Final Paper 2 Strategic Financial Management Chapter 7 Dr. Amit Bagga Phd.,FCA,AICWA,Mcom. Learning Objectives Discuss the objectives of portfolio Management -Risk and Return Phases
More informationEfficient Portfolio and Introduction to Capital Market Line Benninga Chapter 9
Efficient Portfolio and Introduction to Capital Market Line Benninga Chapter 9 Optimal Investment with Risky Assets There are N risky assets, named 1, 2,, N, but no risk-free asset. With fixed total dollar
More informationINTERNATIONAL FINANCE TOPIC
INTERNATIONAL FINANCE 11 TOPIC The Foreign Exchange Market The dollar ($), the euro ( ), and the yen ( ) are three of the world s monies and most international payments are made using one of them. But
More informationFrom Asset Allocation to Risk Allocation
EDHEC-Princeton Conference New-York City, April 3rd, 03 rom Asset Allocation to Risk Allocation Towards a Better Understanding of the True Meaning of Diversification Lionel Martellini Professor of inance,
More informationBachelor Thesis Finance
Bachelor Thesis Finance What is the influence of the FED and ECB announcements in recent years on the eurodollar exchange rate and does the state of the economy affect this influence? Lieke van der Horst
More informationRisks and Rate of Return
Risks and Rate of Return Definition of Risk Risk is a chance of financial loss or the variability of returns associated with a given asset A $1000 holder government bond guarantees its holder $5 interest
More informationRisk Parity Portfolios:
SEPTEMBER 2005 Risk Parity Portfolios: Efficient Portfolios Through True Diversification Edward Qian, Ph.D., CFA Chief Investment Officer and Head of Research, Macro Strategies PanAgora Asset Management
More informationNormative Frameworks for Business Decisions
Normative Frameworks for Business Decisions Lecture 10 edmp: 14.43 / 15.031 / 21A.341/11.161 1 A Bit of Way-Finding: Last two sessions: energy demand by individuals/households Basic rational actor model:
More informationFinancial Markets & Risk
Financial Markets & Risk Dr Cesario MATEUS Senior Lecturer in Finance and Banking Room QA259 Department of Accounting and Finance c.mateus@greenwich.ac.uk www.cesariomateus.com Session 3 Derivatives Binomial
More informationCurrency Risk in the Valuation of Policy Liabilities for Life and Health Insurers
Educational Note Currency Risk in the Valuation of Policy Liabilities for Life and Health Insurers Committee on Life Insurance Financial Reporting December 2009 Document 209121 Ce document est disponible
More informationReading map : Structure of the market Measurement problems. It may simply reflect the profitability of the industry
Reading map : The structure-conduct-performance paradigm is discussed in Chapter 8 of the Carlton & Perloff text book. We have followed the chapter somewhat closely in this case, and covered pages 244-259
More informationINTERNATIONAL FINANCE. Objectives. Financing International Trade. Financing International Trade. Financing International Trade CHAPTER
INTERNATIONAL 34 FINANCE CHAPTER Objectives After studying this chapter, you will able to Explain how international trade is financed Describe a country s balance of payments accounts Explain what determines
More informationChapter 4 Research Methodology
Chapter 4 Research Methodology 4.1 Introduction An exchange rate (also known as a foreign-exchange rate, forex rate, FX rate or Agio) between two currencies is the rate at which one currency will be exchanged
More informationMidterm Exam I: Answer Sheet
Economics 434 Spring 1999 Dr. Ickes Midterm Exam I: Answer Sheet Read the entire exam over carefully before beginning. The value of each question is given. Allocate your time efficiently given the price
More informationLecture 4: Return vs Risk: Mean-Variance Analysis
Lecture 4: Return vs Risk: Mean-Variance Analysis 4.1 Basics Given a cool of many different stocks, you want to decide, for each stock in the pool, whether you include it in your portfolio and (if yes)
More informationFinancial Management_MGT201. Lecture 19 to 22. Important Notes
Financial Management_MGT201 7 th Week of Lectures Lecture 19 to 22 Important Notes Explanation noted by me has shown with & symbols. Lecture No 19: 6 Dec 2015_Tuesday_ 2:13pm 3:02pm RISKS: Its very important
More informationDefine risk, risk aversion, and riskreturn
Risk and 1 Learning Objectives Define risk, risk aversion, and riskreturn tradeoff. Measure risk. Identify different types of risk. Explain methods of risk reduction. Describe how firms compensate for
More informationFinancial Market Analysis (FMAx) Module 6
Financial Market Analysis (FMAx) Module 6 Asset Allocation and iversification This training material is the property of the International Monetary Fund (IMF) and is intended for use in IMF Institute for
More informationExchange rate exposure, hedging, and the use of foreign currency derivates
Exchange rate exposure, hedging, and the use of foreign currency derivates George Allayannis, Eli Ofek Presented by: Inés Horváthová, Tadeáš Kopecký, Radan Papoušek, Hana Štefanová Outline Introduction
More informationu (x) < 0. and if you believe in diminishing return of the wealth, then you would require
Chapter 8 Markowitz Portfolio Theory 8.7 Investor Utility Functions People are always asked the question: would more money make you happier? The answer is usually yes. The next question is how much more
More informationLECTURE 10: Purchasing Power Parity
LECTURE 10: Purchasing Power Parity Primary Motivation: How realistic is the assumption P = P? Secondary motivation: How integrated are global goods markets? (1) Definition(s) of PPP (Absolute vs. Relative
More informationRandom Variables and Applications OPRE 6301
Random Variables and Applications OPRE 6301 Random Variables... As noted earlier, variability is omnipresent in the business world. To model variability probabilistically, we need the concept of a random
More informationLECTURE 3. Market Efficiency & Investment Valuation - EMH and Behavioral Analysis. The Quants Book Eugene Fama and Cliff Asnes
Baruch College Executive MS in Financial Statement Analysis CHAPTER 6 (PARTIAL) LECTURE 3 Market Efficiency & Investment Valuation - EMH and Behavioral Analysis Professor s Notes Are markets efficient?????
More information2) Bonds are financial instruments representing partial ownership of a firm. Answer: FALSE Diff: 1 Question Status: Revised
Personal Finance, 6e (Madura) Chapter 14 Investing Fundamentals 14.1 Types of Investments 1) Before you start an investment program, you should ensure liquidity by having money in financial institutions
More informationThe Open Economy. (c) Copyright 1998 by Douglas H. Joines 1
The Open Economy (c) Copyright 1998 by Douglas H. Joines 1 Module Objectives Know the major items in the Balance of Payments Accounts Know the determinants of the trade balance Know the major determinants
More informationDerivation Of The Capital Asset Pricing Model Part I - A Single Source Of Uncertainty
Derivation Of The Capital Asset Pricing Model Part I - A Single Source Of Uncertainty Gary Schurman MB, CFA August, 2012 The Capital Asset Pricing Model CAPM is used to estimate the required rate of return
More informationRandom Walk Expectations and the Forward. Discount Puzzle 1
Random Walk Expectations and the Forward Discount Puzzle 1 Philippe Bacchetta Eric van Wincoop January 10, 007 1 Prepared for the May 007 issue of the American Economic Review, Papers and Proceedings.
More informationStochastic Programming for Financial Applications
Stochastic Programming for Financial Applications SAMSI Finance Group Project Adam Schmidt, Andrew Hutchens, Hannah Adams, Hao Wang, Nathan Miller, William Pfeiffer Agenda Portfolio Optimization Our Formulation
More informationDiscussion of Jeffrey Frankel s Systematic Managed Floating. by Assaf Razin. The 4th Asian Monetary Policy Forum, Singapore, 26 May, 2017
Discussion of Jeffrey Frankel s Systematic Managed Floating by Assaf Razin The 4th Asian Monetary Policy Forum, Singapore, 26 May, 2017 Scope Jeff s paper proposes to define an intermediate arrangement,
More informationDr. Harry Markowitz The Father of Modern Portfolio Theory and the Insight of Behavioral Finance
Special Report Part 1 of 2 Dr. Harry Markowitz The Father of Modern Portfolio Theory and the Insight of Behavioral Finance A Special Interview with SkyView s Advisory Board Member Dr. Harry Markowitz Nobel
More informationAdvanced Financial Economics Homework 2 Due on April 14th before class
Advanced Financial Economics Homework 2 Due on April 14th before class March 30, 2015 1. (20 points) An agent has Y 0 = 1 to invest. On the market two financial assets exist. The first one is riskless.
More informationII. Currency & Hedging 1
II. Currency & Hedging 1 Overview This presentation is designed to: 1. Address why currency is a significant consideration for institutional investors: Components of international returns to US investors
More informationCommercial Real Estate s Correlation to Other Asset Classes June 2015
Commercial Real Estate s Correlation to Other Asset Classes June 2015 Executive Summary The theory of diversification (Markowitz 1952) suggests that putting all of your eggs in one basket (or asset class)
More informationRelationships among Exchange Rates, Inflation, and Interest Rates
Relationships among Exchange Rates, Inflation, and Interest Rates Chapter Objectives To explain the purchasing power parity (PPP) and international Fisher effect (IFE) theories, and their implications
More information