Question
b. Explain why it might still be more efficient on a risk/reward basis to invest internationally rather than only domestically in the long run. The
b. Explain why it might still be more efficient on a risk/reward basis to invest internationally rather than only domestically in the long run. The HFS Trustees have decided to invest in non-U.S. equity markets and have hired Jaco Hind, a specialist manager, to implement this decision. He has recommended that an unhedged equities position be taken in Japan, providing the following comment and the table data to support his views: Appreciation of a foreign currency increases the returns to a U.S. dollar investor. Since appreciation of the Yen from 100/$U.S. to 98/$U.S. is expected, the Japanese stock position should not be hedged
Market Rates and Hind's Expectations |
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| U.S. | Japan |
Spot rate (yen per $U.S.) | n/a | 100 | |||
Hind's 12-month currency forecast (yen per $U.S.) | n/a | 98 | |||
1-year Eurocurrency rate (% per annum) | 6.00 | 0.80 | |||
Hind's 1-year inflation forecast (% per annum) |
| 3.00 | 0.50 |
Assume that the investment horizon is one year and that there are not costs associated with currency hedging.
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