Global finance

Q1.

a). Foreign investment can be described as investing in a foreign country, instead of the home country. It usually involves the flowing of equity/capital from one country to the other, where foreigners own a business or where these owners have a controlling interest in the established business in the foreign country. For instance, gambling firms such as Betway Sports Betting is a British owned firm in Kenya. The majority shareholders are foreigners who have a controlling interest in the corporation. Though they have set up operations in Kenya, the owners/shareholders are foreigners.

Foreign investment is a key contributor to the growth of an economy. From the example above, Betway has employed many Kenyans, mostly the youth and this has greatly helped in the rising of living standards of the employees. Also, Betway pays taxes to the Kenyan government, and this tax can be used to improve the quality of life of Kenyans through development of infrastructure, social amenities and so on,

On the other hand, foreign portfolio investments can be seen as the buying and selling of financial assets by foreign investors. These financial assets may include money market instruments such as treasury bonds, government bonds, certificates of deposits (CD, s), commercial papers etc. also, other assets that foreign investors may be interested in are stocks, mutual funds. Investors may be willing to invest in such portfolios provided that the rate of return is suitable, and if theyre going to be compensated for the risk they are taking when investing in foreign markets.

b) Diversification of the investors portfolio.

With foreign portfolio investments (FPI), investors can have a variety of investment options as opposed to investing only in one area. Diversifying an investment portfolio would in turn diversify risk, whereby the investor will achieve a risk adjusted return. Investing in a limited range of areas would mean that investors would suffer a huge deal of loss if their investments do not perform as they had anticipated. Therefore, to avoid this they would opt to invest in a wide range of areas and fields so that even if one asset underperforms, the other assets can lift the overall performance of the investment through diversification.

International credit

Foreign investors will have the opportunity to be eligible for credit or loans in foreign markets and this is a great boost if credit is needed to establish business operations in foreign markets. For instance, if Betway wishes to set up shop in Ethiopia and they need loans, they would be eligible to apply for a loan with Ethiopian banks. This would also promote the growth of such banks since they would earn interest income and other incomes associated with the foreign investments. Furthermore, if the credit sources back home are more expensive in the home country than in a foreign market, then it would be easier to borrow from the foreign lenders since this would lower the cost of borrowing considerably.

You may also find that a foreign market has more favorable terms on credit and disbursement of funds from lenders is easier compared to the home lenders. This would hugely aid in deciding whether a project will be undertaken or not

Liquidity of domestic capital markets

Foreign portfolio investments (FPI) make the involved market become more liquid since a wider range of financial investments can be financed. Investors can be assured that they will have the ability to manage their investment portfolios and if need be, sell their financial securities or assets quickly without any delays or barriers. In home markets, you may find that liquidation is hampered by numerous and hectic regulations, and this means that most of the time the investor may not sell the assets or securities as quick as in foreign markets.

Promotes the development of equity markets.

Stiff competition for financing of foreign projects and investments will keep financiers on their toes. Only those with superior performance and prospects will be rewarded since investors will want to deal only with those financiers who are competing favorably. As the liquidity of the market increases and develops, prices of equity/capital will consequently go up and these prices become relevant to the investors in terms of value and the result will be increased efficiency in the foreign market

International portfolio investment allows access to foreign markets with varying features.

This is in terms of different risk and return features, whereby the foreign investor is looking to achieve greater returns on his or her investment. To achieve a higher return, the investor must be willing to take on a greater amount of risk and he or she may do this by venturing into foreign markets. Such a foreign market may offer an interested investor a different risk-return profile.

Exchange rate benefits

At times, the foreign market may have a stronger currency as opposed to the home market. An investor who has a portfolio in such a country may benefit from arbitrage profits which result from fluctuation of prices of currency.

Q2

   

Q3

a)

   

b)

   

Q4

a). A eurocurrency refers to the currency that governments or even corporations that are operating in an outside or foreign markets, hold on the deposits. For instance, if an American firm or corporation decides to hold deposits in a British bank, then this would be referred to as a eurocurrency. Examples of a eurocurrency are euro-dollar or euro-pound.

Globalization is one of the major factors that has made the eurocurrency a completely vital facet of the financial system around the world. Since globalization has increased the number of international transactions, many financial players need to access local currencies in foreign markets. This has therefore led to the eurocurrency becoming a large and very important currency to have. Banks in various countries must exchange and lend foreign currencies on a regular basis out of their eurocurrency deposits.

Eurocurrency also allows for easier access of funds since regulations may be less hectic compared to regulations in the home country. Eurocurrency allows quick and very efficient access to short term financing which makes investing much easier.

LIBID (London Interbank Bid Rate) refers to the bid or ask rate at which a bank is willing to lend a eurocurrency to another bank situated in a foreign market. When LIBID is high, it usually means that many borrowers or banks want to borrow. This creates a huge demand for eurocurrency. LIBID is not publicly available, and it is not standardized. It cannot be used anywhere outside of the interbank lending market.

LIBID is considered as a reference rate for financial assets and instruments like short term futures, forward rate agreements, currency options, interest rate swaps and so on.

On the other hand, LIBOR (London Interbank Offer Rate) refers to the rate at which average coupons the banks in London are willing to lend to each other. Its simply the offer rate. LIBOR is regularly utilized as a benchmark rate of interest that is computed and published by ICE (Intercontinental Exchange). Unlike LIBID it cant be used outside of the interbank lending market

Both LIBID and LIBOR are set by banks in the London Interbank market, and they are used as reference rates. Also, both rates are used as reference rates for short term financial instruments. An average of these two rates can be computed to obtain LIMEAN which is used to many benefits to individuals, businesses, and economies.

b). Prices can be easily compared between two different countries. This will consequently create healthy competition, and this would be of huge benefit to the consumers of various nations

The eurocurrency also creates stability in the prices of goods and services around the world meaning fluctuations in prices would not greatly affect the market

Eurocurrency has also improved the economies of many countries around the world by stabilizing the prices and by ensuring that those economies grow progressively over time

It has given the European continent an identity since it originated from Europe and majority of its users are the countries situated in Europe.

It has reduced uncertainty due to fluctuations in the price of currency and this has greatly encouraged foreign investors since they dont panic because of the changing prices of different currencies.

It has also improved the standards of living and quality of life for a lot of people around the world. This is through creation of thousands, if not millions of jobs.