Capital budgeting is an essential function for any business planning new investments, and it becomes particularly complex when undertaken in an international context. For banks and financial institutions engaged in or advising on overseas projects, understanding the unique international capital budgeting issues is critical to making informed investment decisions that enhance shareholder value while managing…
Arbitrage Pricing Theory (APT) is a financial model used to determine the expected return on an asset by considering its exposure to multiple sources of systematic risk. Developed by economist Stephen Ross in 1976 as an alternative to the Capital Asset Pricing Model (CAPM), APT offers a more flexible and multifactor approach to asset pricing.…
View Post The Capital Asset Pricing Model (CAPM) is a fundamental financial model used to determine the expected return on an investment, considering its risk relative to the overall market. CAPM establishes a linear relationship between the expected return of an asset and its systematic risk, measured by beta. Key Elements of CAPM • Expected…
Exchange risk and country risk are two fundamental sources of uncertainty that investors face when considering foreign investments. Both directly influence the expected return and overall risk profile of international projects and portfolio allocations. Exchange Risk (Foreign Exchange Risk) Exchange risk arises from fluctuations in currency exchange rates between a project’s foreign currency and the…
International portfolio investment refers to purchasing financial assets such as stocks, bonds, or securities in foreign countries to diversify investments globally. This can be achieved through both direct and indirect channels, each with distinct characteristics and mechanisms. Direct Channels Direct channels involve investors directly purchasing foreign securities without intermediaries. Investors acquire financial assets listed on…
Institutional constraints in foreign investment and international portfolio investment refer to the formal and informal rules, regulations, policies, and organizational frameworks that affect cross-border investment activities. These constraints shape how foreign investors—such as multinational corporations, institutional investors, and portfolio managers—navigate the challenges and opportunities of investing in foreign countries. They have a significant impact on…
International portfolio investment refers to the practice of building a diversified investment portfolio by allocating capital across financial assets in multiple foreign countries. This strategy allows investors to gain exposure to both developed and emerging markets outside their home country, offering several potential benefits as well as risks. Key aspects of international portfolio investment include:…
Foreign currency discount rates computation involves determining an appropriate discount rate to use when evaluating cash flows denominated in a foreign currency, typically for international project investments or valuations. The key to this computation is to reflect the risk profile, interest rate environment, and currency-specific factors related to the foreign currency and market. Basic Principle…
When dealing with international project investments, understanding and managing cash flows in both foreign (host country) currency and home (parent company) currency is critical for accurate capital budgeting and risk assessment. Foreign and Home Currency Cash Flows in International Investment Approaches in Capital Budgeting for Currency Cash Flows Exchange Rate Risk and Its Impact on…
Special considerations for foreign investment analysis encompass various critical factors that investors must evaluate to make informed decisions about investing in international projects or companies. These considerations address legal, economic, political, financial, and operational challenges that influence the success and risks of foreign investments. Below are key special considerations: Special considerations in foreign investment analysis…