Investments, tenth edition

  Political Risk 

 In principle, security analysis at the macroeconomic, industry, and firm-specific level is 

similar in all countries. Such analysis aims to provide estimates of expected returns and 

risk of individual assets and portfolios. However, to achieve the same quality of informa-

tion about assets in a foreign country is by nature more difficult and hence more expensive. 

Moreover, the risk of coming by false or misleading information is greater. 

 If the forward exchange rate in Example 25.1 had been  F  

0

   5  $1.93/£ when the invest-

ment was made, the U.S. investor could have assured a riskless dollar-denominated 

return by arranging to deliver the £11,000 at the forward exchange rate of $1.93/£. In 

this case, the riskless U.S. return would then have been 6.15%:   

[1 1 r

f

(UK)]F

0

/E

0

 5 (1.10)1.93/2.00 5 1.0615  

 Example  25.2 

Hedging Exchange Rate Risk 

bod61671_ch25_882-925.indd   891

bod61671_ch25_882-925.indd   891

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  Applied Portfolio Management