Investments of an international company in securities, Features...

International company investments in securities

Features and principles of international investment

The functioning of a successful company can not but be related to investments in the current business, capital assets and securities, as well as into intellectual property.

Under investments it is understood in the most general sense of the means (money, securities, other property, including property rights having monetary value) invested in objects of business and (or) other activity with the purpose of profit and (or) achievement of other useful effect.

Currently, national companies, including United States ones, are increasingly running to international investment, sending their financial assets to purchase securities of issuers from other countries, nominated in foreign currency. The broad development of international investment is primarily due to the fact that they make it possible to obtain a higher quality of investment, in particular, greater profitability and less risk compared to purely national investments. Greater profitability can be ensured in this case both at the expense of the possibility of placing funds in more profitable foreign stock markets, and due to the possible growth of foreign exchange rates relative to the currency of a particular investor.

The smaller risk of the portfolio of international investments is due to the fact that the economic systems of different countries are developing unevenly, the economic cycles of different countries are usually not fully synchronized in time, and if some national securities markets fall, others at the same time can grow.

A financial manager, who is a fairly experienced trader, will buy securities in stock markets, which he believes will grow, neglecting securities traded in markets that can "fall" (or, especially, already "drop"). Considering the above, any investor can reduce the risk of investment of an international company by diversifying the investment portfolio, i.е. purchase of securities of various national stock markets. Of course, due to the growing activity of international economic relations, the internationalization and globalization of the world economy, the degree of dependence of national stock markets on each other is increasing. Nevertheless, the relative independence of the economic systems of different countries, while still relatively independent, ensures the relative independence of their stock markets, which, incidentally, is confirmed by the existing practice of international investment.

The specific feature of the portfolio of international investment, obviously, is the currency risk. However, this risk and a well diversified portfolio are much lower than the risks of securities portfolios of exclusively national markets, since the fall in the rates of some currencies means the strengthening of others. The fall in the exchange rate of the investor's currency means an increase in the exchange rate of foreign currencies and, thus, an increase in the yield of the international portfolio of investments.

In addition, the currency risk can be significantly reduced through the use of special methods of its hedging, considered above. It should also be taken into account that an international investor who wants to take risks for high returns can provide it not only in the rapidly growing national economies of the world economic system, but also from the growth of foreign exchange rates.

Basic principles of international investment

A company that proposes to make international investments must, first of all, formulate criteria for such investment, which may include:

• ensuring the optimal ratio between yield and portfolio risk;

• Maximization of the portfolio return at a given level of risk;

• minimization of portfolio risk at a given level of its return.

All possible options for the formation of the portfolio of international investment are given in Table. 3.1.

The main stages of the algorithm for the formation of the investment portfolio by the hypothetical company AFERISTO, carrying out international investment under the first option, are provided in Fig. 3.4.

Simultaneously with the formation of the portfolio structure, the international investor must determine the principles of the approach to managing his risk.

Table 3.1

Sequence of investment portfolio formation

Segment Portfolio

On the formation options

I

II

III

IV

Justification of the country (currency) of investment

Choice of types of securities

Defining specific securities

Example of the formation of an internationally invested portfolio

Fig. 3.4. Example of the formation of an internationally invested portfolio

The following options are possible:

• Do not take any measures, hoping for a favorable market environment;

• Diversify investments by countries, types of assets, sectors of the economy and securities;

• increase the share of assets in risk-free assets (for example, government bonds);

• choose less risky assets and investment currencies based on the forecast of their quality;

• Take special hedging measures against adverse changes in the price of assets and (or) the exchange rate.

When choosing the principles of reducing the risk of the portfolio of international investments, one should keep in mind that this is usually associated with a fall in the portfolio return, including additional costs for their practical implementation, as well as the inability to take advantage of the current investor-friendly situation.

In view of the foregoing, an international investor must:

• Know the international market for investments and the associated financial risks;

• Know the characteristics and characteristics of securities traded in various national markets and the European market;

• Know the indicators that characterize the investment market, their nature and methods of calculation;

• be able to read and analyze data on investment markets and financial markets, given in the press;

• have an idea of ​​the factors that affect the prices of assets in the international market, and their relationship;

• Know the methods and tools to reduce the risk of international investment;

• Know and be able to calculate the quality indicators of the portfolio of international investment.

These questions are discussed in the following sections of this tutorial.

thematic pictures

Also We Can Offer!

Other services that we offer

If you don’t see the necessary subject, paper type, or topic in our list of available services and examples, don’t worry! We have a number of other academic disciplines to suit the needs of anyone who visits this website looking for help.

How to ...

We made your life easier with putting together a big number of articles and guidelines on how to plan and write different types of assignments (Essay, Research Paper, Dissertation etc)