Investing in Foreign Securities: Opportunities and Risks
Investing in foreign securities provides opportunities for growth and diversification, tapping into developed and less-developed countries. However, investors must navigate risks such as political instability, foreign taxation, and exchange rate fluctuations, including potential devaluation and revaluation of currencies. Understanding the balance of payments, including current and capital accounts, is crucial. Utilizing mutual funds, global ETFs, and currency hedging strategies can facilitate international investment while managing risks. Diversification across varied markets may yield higher returns compared to domestic-only investments.
Investing in Foreign Securities: Opportunities and Risks
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Presentation Transcript
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)
Special Considerations • Political risks • Foreign taxation • Fluctuations in exchange rates • devaluation (depreciation) • revaluation (appreciation)
Balance of Payments • Current account • merchandise trade deficit or surplus • Capital account • Official reserve account - The IMF
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
Advantages of Investing in Foreign Securities • Possible higher returns • Diversification • importance of lack of correlation between US security markets and foreign markets
Mutual Funds Investing in foreign securities through mutual funds • Global funds • International funds • Regional funds • Emerging market funds
Other Means to Invest in Foreign Securities • Specialized closed-end investment companies • iShares • exchange-traded index funds for foreign stock markets
