Dias Serikbayev (tp020865) Part a Question a

As an investor on the behalf of the company I would like to be more conservative about foreign investments. First and most important step in the investment decision making is a thorough analysis on both of the countries economics and the future performance of both of the economics. After the thorough analysis I will assume whether it is more profitable to invest in Poland or it is better to invest in some other businesses. In this situation it is risky to invest in Poland and in order to minimize risk cover the position from the exchange rate changes between USD and PLN, therefore using the forwards. The best decision here is to lock the forward contract on PLN at $0.39, thus providing the better opportunity to invest in Poland funds.

Question b

The spot rate is 1 PLN is equal to $0.4

Forward rate is 1 PLN is equal to $0.39

Interest rates are 14% in Poland and 9% in USA

The investment capital is $50 Million

Step 1

Convert USD to PLN at rate $0.40 per 1 PLN

Step 2

Invest PLN125 Million in 1 year Polish Treasures at 14%

Step 3

Convert back PLN to USD at rate $0.39 per 1 PLN

Step 4

Determine the profit or loss

So the expected profit is $5,575,000 and the expected return is 11.25%

Question c

The arbitrage risk is always high. The first risk the investor take is the loss probability. The demand for PLN can rise unexpectedly therefore bringing the value of PLN down. The exchange rate can also be brought down by unexpected bad news in Poland or good news in USA, for instance it is advised not to “short” in the market every first Friday of the month because of the uncertainty on the market caused by Non-Farm Payroll news. Applying this example to the situation, let’s say, if the Non-Farm Payroll increases, it will positively impact on USD and the current arbitrage strategy will not work.

Also the risk occurs in the costs of the transaction such as taxation, commissions and other costs, which can be a possible reason to not make the current arbitrage strategy only because it are too high.

Question d

As it was said above as an investor on the behalf of the company I would rather be a conservative investor or even defensive investor than an aggressive investor. The arbitrage always has the aggressive strategy inside because of obtaining higher risk. The U.S Treasures are less risky; therefore I would choose to invest in U.S Treasuries.

On the other hand, If I had my own funds to invest I would still choose the U.S Treasuries, firstly because of they are less risk and secondly because they provide 9% yield whereas the normal rate for U.S Treasuries in the last decade is fluctuating from 2% to 4%. According to rateinflation.com the inflation rate in US is only 1.658%. Therefore 9% -1.658% would be 7.342% minus taxable income.

Part B

Introduction

The stock market of any country is closely connected with development of national economy, and also with the events occurring in the world financial markets. The stock market experiences up and downs under the influence of any economic and political, internal and external factors. Nowadays, because of the modern international capital interlacing the fluctuations in stock markets of some countries can have a certain impact on other countries’ stock markets. Stock markets sensitively react to political events and currency shock

A key determinant of the development of the stock market is capitalization ratio. Mentioned ratio rose hugely in between 1980s and 1990s in the countries like Brazil, Chile, India and Mexico. For instance in Chile it went from 10 to over 84% of GDP.

Gurley and Shaw (1955, 1960, 1967), McKinnon (1973) and Shaw (1973) contributed that the relationship between financial development and economic growth has been an important issue of debate.

The financial system consists of financial institutes such as banks, insurance companies, and pension funds and bond and stock markets. Both of them are dependent from each other. Demirguc- Kunt and Levine (1996a), Singh (1997), and Levine and Zervos (1998) stated that the stock market development plays an important role in predicting future economic growth. First, the financial markets grow providing the economic to grow, the economic growth affect the growth of financial markets.