1.Portfolio of International Funds an Australian portfolio manager is considering increasing the diversification of her portfolio by investing in foreign mutual funds with the following features:

Australia Expected Return 15% Standard Deviation 10%

Correlation with Australia 1.0

United Kingdom 12%

9% 0.40

Spain 6% 6%

0.05

a. Compute the expected return and standard deviation of the following portfolios: Portfolio A: 25% UK, 75% Australia

Portfolio B: 25% Spain, 75% Australia

Portfolio C: 50% UK, 50% Australia

Portfolio D: 50% Spain, 50% Australia Portfolio E: 75% UK, 25% Australia Portfolio F: 75% Spain, 25% Australia

b. Based on your calculation in a) above, which country seems to offer the best diversification potential for Australian investors-UK or Spain?

2. What are the alternative instruments that can be used to raise equity from global markets?

3.What are the different instruments through which an Australian investor can diversify internationally?

4. Trooper limited is an American company which needs to raise US$1,000,000 for its expansion inside US. The options are:

a. A 2-year floating rate note at 1% above the 1-year US Dollar rate. Interest is paid once a year.

b. A 2-year bond sold in the US at a fixed interest rate of 5%.

Currently, the 1-year US dollar LIBOR rate is 3.50% and is expected to rise to 4.5% next year. Which security should the treasurer choose if borrowing costs are same for both securities?

5. Western Gas Limited just agreed to a long-term deal in which it will export natural gas to Japan. It

needs funds to finance the production of the natural gas that it will export. The export will be denominated in Australian dollars. The prevailing Australian long-term interest rate is 6 per cent versus 3 per cent in Japan. Assume that interest rate parity exists, and that Western Gas Limited believes that the International Fisher effect holds.

Should Western Gas Limited finance its production with yen and leave itself open to the exchange rate risk? Explain.

Should Western Gas Limited finance its production with yen and simultaneously engage in forward contracts to hedge its exposure to exchange rate risk?