International Investment Risks

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Questions and Answers

Which of the following is NOT a potential risk associated with indirect investments?

Liquidity Risk (correct)

Market Risk

Currency Risk

Managerial Risk

Which of the following investment strategies is most likely to be employed by a fund manager seeking to mitigate currency risk?

Investing in a diversified portfolio of global equities

Using derivatives to hedge against currency fluctuations (correct)

Focusing on investments in emerging markets with high growth potential

Investing in foreign currency-denominated bonds

How does indirect investment help mitigate idiosyncratic risks associated with individual investments?

By offering professional management services from experienced fund managers

By providing access to investment opportunities in emerging markets

By minimizing the impact of market fluctuations on investment returns

By investing in a diversified portfolio of assets across multiple geographies and sectors (correct)

What is the primary risk associated with direct investment in foreign markets?

Exposure to political and regulatory changes in the host country Signup and view all the answers

What is a potential advantage of indirect investment over direct investment?

Access to a wider range of investment opportunities Signup and view all the answers

Which of the following is a key factor that influences the performance of indirect investment vehicles?

The specific investment strategies employed by fund managers Signup and view all the answers

How does global portfolio diversification help manage economic exposure?

By reducing the impact of individual asset performance on the overall portfolio Signup and view all the answers

Which of the following is a potential drawback of using derivatives to hedge against currency risk?

They can lead to significant losses if the market moves against the hedge Signup and view all the answers

What is a key advantage of direct investment that allows investors to capitalize on growth opportunities and operational efficiencies, potentially leading to higher returns?

Potential for Higher Returns Signup and view all the answers

Which of the following is NOT a risk associated with direct investment?

Diversification of Portfolio Risk Signup and view all the answers

How can direct investment strategies mitigate the risk of currency fluctuations?

All of the above. Signup and view all the answers

Which of the following is NOT a common strategy for managing economic exposure in international investment?

Passive Investment Signup and view all the answers

What is a key advantage of indirect investment compared to direct investment?

Greater flexibility and liquidity. Signup and view all the answers

Which of the following is NOT a common risk associated with indirect investment?

Operational Risks Signup and view all the answers

How can global portfolio diversification help mitigate the risks of international investment?

All of the above. Signup and view all the answers

Which of the following is NOT a factor to consider when choosing between direct and indirect investment strategies?

Market Liquidity Signup and view all the answers

How can FDI contribute to economic instability?

By creating speculative bubbles in asset markets Signup and view all the answers

Which strategy involves pursuing FDI to gain access to natural resources?

Resource Seeking Signup and view all the answers

What is NOT a potential consequence of rapid industrialization due to FDI?

Job creation Signup and view all the answers

What benefit does FDI provide concerning technology?

It promotes technology transfer Signup and view all the answers

Which of the following describes a key reason for MNCs to seek market access through FDI?

To tap into new markets Signup and view all the answers

Which of the following best describes efficiency-seeking FDI?

Setting up operations to leverage cost advantages Signup and view all the answers

What long-term challenge can result from environmental degradation linked to FDI?

Sustainability issues Signup and view all the answers

Direct Investment Strategies are primarily concerned with the following aspects, EXCEPT?

Mitigating foreign tax burdens Signup and view all the answers

Study Notes

Currency and Political Risk

Fluctuations in foreign exchange rates impact the valuation of foreign currency-denominated investments, leading to currency risk for direct investors.
Changes in governmental policies, regulations, and political stability significantly affect direct investments, increasing overall risk exposure.

Indirect Investment

Involves gaining access to foreign markets through mutual funds, ETFs, and multinational corporations.
Offers diversification benefits by providing exposure to a wide array of assets, reducing idiosyncratic risks.
Managed by experienced professionals who conduct thorough research to optimize returns, giving investors specialized expertise.
Provides liquidity and accessibility, allowing easy buying and selling on public exchanges, enhancing flexibility.

Risks of Indirect Investment

Subject to market risk, with investment returns vulnerable to macroeconomic factors and market fluctuations.
Managerial risk exists due to dependence on fund managers’ expertise; poor performance can lead to suboptimal investment decisions.
Economic instability may deepen due to FDI, causing income disparities and inflationary pressures.
Environmental degradation can occur driven by rapid industrialization from FDI, resulting in pollution, deforestation, and resource depletion.

Benefits of Foreign Direct Investment (FDI)

FDI injects capital into host countries, promoting economic growth, job creation, and investment, especially in capital-intensive sectors.
Multinational corporations (MNCs) transfer advanced technologies, managerial skills, and best practices, boosting productivity and competitiveness in host nations.
FDI facilitates market access, enabling both host countries and investing MNCs to enter new markets and diversify their revenue streams.
Contributes to human capital development through training programs and knowledge transfers, supporting skills enhancement and innovation.

Strategies of Foreign Direct Investment

Market Seeking: MNCs pursue FDI to access new markets, exploit economies of scale, and meet consumer demand in different countries.
Resource Seeking: Investments aim to secure natural resources and labor at lower costs than in the home country.
Efficiency Seeking: MNCs establish foreign operations to benefit from cost advantages such as cheaper labor and favorable regulations.
Strategic Asset Seeking: FDI is used to acquire valuable intellectual property, brands, and distribution networks, enhancing competitive positioning.

Direct Investment Overview

Direct investment involves acquiring a significant stake in a foreign enterprise, allowing for managerial control and influence over operations.
Offers greater operational control, enabling tailored strategies to optimize returns effectively.
Potential for higher financial returns through active management of the invested enterprise.
Allows for strategic asset allocation across different regions and industries, diversifying risks and maximizing returns.

Risks of Direct Investment

Direct investors face operational risks due to challenges in managing foreign enterprises, including cultural differences and regulatory complexities.

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Description

Learn about the risks associated with international investments, including currency risk and political/regulatory risks. Understand how these risks can impact direct and indirect investments in foreign markets.