EECS 1530 Lecture 14: EECS 1530 Lecture 14 Notes
21 Jun 2018
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EECS 1530 Lecture 14 Notes
Introduction
Exchange Rates
When investors invest in a security in a foreign country, their return is affected
The change in the value of the security
The change in the value of the currency in which the security is denominated
If a country’s home currency is expected to strengthen, then foreign investors may be
willing to invest in that country’s securities in order to benefit from the currency
movement.
Conversely, if a country’s home currency is expected to weaken then foreign investors
may well prefer to purchase securities in other countries.
Impact of International Capital Flows
The United States relies heavily on foreign capital in many ways.
First, there is foreign investment in the United States to build manufacturing plants,
offices, and other buildings.
Second, foreign investors purchase U.S. debt securities issued by U.S. firms and thereby
serve as creditors to these firms.
Third, foreign investors purchase Treasury debt securities and thus serve as creditors to
the U.S. government.
Foreign investors are especially attracted to U.S. financial markets when the interest
rate in their home country is substantially lower than that in the United States.
For example, Japan’s annual interest rate has been close to 1 percent for several years
because the supply of funds in its credit market is quite large.
At the same time, however, Japan’s economy has been stagnant and so the demand for
funds to support business growth there has been limited.
Given the low interest rates in Japan, many Japanese investors invest their funds in the
United States so as to earn a higher interest rate.
Document Summary
When investors invest in a security in a foreign country, their return is affected. The united states relies heavily on foreign capital in many ways. First, there is foreign investment in the united states to build manufacturing plants, offices, and other buildings. United states so as to earn a higher interest rate. A security in a foreign country, their return is affected. The change in the value of the security. The change in the value of the currency in which the security is denominated. If a country"s home currency is expected to strengthen, then foreign investors may be willing to invest in that country"s securities in order to benefit from the currency movement. Conversely, if a country"s home currency is expected to weaken then foreign investors may well prefer to purchase securities in other countries. There is foreign investment in the united states to build manufacturing plants, offices, and other buildings.
