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Chapter 22

Chapter 22. Investing in Foreign Securities. Investing in Foreign Securities. US security market accounts for over half of the value of the world's security markets Foreign investments offer the opportunity for growth Developed countries (DCs) Less-developed countries (LCDs).

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Chapter 22

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  1. Chapter 22 Investing in Foreign Securities

  2. Investing in Foreign Securities • US security market accounts for over half of the value of the world's security markets • Foreign investments offer the opportunity for growth • Developed countries (DCs) • Less-developed countries (LCDs)

  3. Special Considerations • Political risks • Foreign taxation • Fluctuations in exchange rates • devaluation (depreciation) • revaluation (appreciation)

  4. Balance of Payments • Current account • merchandise trade deficit or surplus • Capital account • Official reserve account - The IMF

  5. U.S. Merchandise Trade Balance, 1970-2000 (in Billions)

  6. Exchange Rates • Vary daily • Risk reduction through hedging with currency futures • if long in a currency, short the futures • if short in a currency, go long in the futures

  7. Fluctuations in the British Pound

  8. Advantages of Investing in Foreign Securities • Possible higher returns • Diversification • importance of lack of correlation between US security markets and foreign markets

  9. Correlation: EAFE andS&P 500 Indexes

  10. Mutual Funds Investing in foreign securities through mutual funds • Global funds • International funds • Regional funds • Emerging market funds

  11. Other Means to Invest in Foreign Securities • Specialized closed-end investment companies • iShares • exchange-traded index funds for foreign stock markets

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