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Questions and Answers
Which of the following is NOT a potential risk associated with indirect investments?
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?
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?
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?
What is the primary risk associated with direct investment in foreign markets?
What is a potential advantage of indirect investment over direct investment?
What is a potential advantage of indirect investment over direct investment?
Which of the following is a key factor that influences the performance of indirect investment vehicles?
Which of the following is a key factor that influences the performance of indirect investment vehicles?
How does global portfolio diversification help manage economic exposure?
How does global portfolio diversification help manage economic exposure?
Which of the following is a potential drawback of using derivatives to hedge against currency risk?
Which of the following is a potential drawback of using derivatives to hedge against currency risk?
What is a key advantage of direct investment that allows investors to capitalize on growth opportunities and operational efficiencies, potentially leading to higher returns?
What is a key advantage of direct investment that allows investors to capitalize on growth opportunities and operational efficiencies, potentially leading to higher returns?
Which of the following is NOT a risk associated with direct investment?
Which of the following is NOT a risk associated with direct investment?
How can direct investment strategies mitigate the risk of currency fluctuations?
How can direct investment strategies mitigate the risk of currency fluctuations?
Which of the following is NOT a common strategy for managing economic exposure in international investment?
Which of the following is NOT a common strategy for managing economic exposure in international investment?
What is a key advantage of indirect investment compared to direct investment?
What is a key advantage of indirect investment compared to direct investment?
Which of the following is NOT a common risk associated with indirect investment?
Which of the following is NOT a common risk associated with indirect investment?
How can global portfolio diversification help mitigate the risks of international investment?
How can global portfolio diversification help mitigate the risks of international investment?
Which of the following is NOT a factor to consider when choosing between direct and indirect investment strategies?
Which of the following is NOT a factor to consider when choosing between direct and indirect investment strategies?
How can FDI contribute to economic instability?
How can FDI contribute to economic instability?
Which strategy involves pursuing FDI to gain access to natural resources?
Which strategy involves pursuing FDI to gain access to natural resources?
What is NOT a potential consequence of rapid industrialization due to FDI?
What is NOT a potential consequence of rapid industrialization due to FDI?
What benefit does FDI provide concerning technology?
What benefit does FDI provide concerning technology?
Which of the following describes a key reason for MNCs to seek market access through FDI?
Which of the following describes a key reason for MNCs to seek market access through FDI?
Which of the following best describes efficiency-seeking FDI?
Which of the following best describes efficiency-seeking FDI?
What long-term challenge can result from environmental degradation linked to FDI?
What long-term challenge can result from environmental degradation linked to FDI?
Direct Investment Strategies are primarily concerned with the following aspects, EXCEPT?
Direct Investment Strategies are primarily concerned with the following aspects, EXCEPT?
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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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