To: Dr. AleksandarDjordjevic
From: Samaa Al Subhi (Student ID: 0663977)
Subject: Week 6 Business Brief – Investment
Date: November 04, 2017
Business Brief – Investing in Daiwa House Industry Shares or Bonds
This business brief will discuss whether an investor should invest in Daiwa House Industry equity stock or bonds (debt). The brief discusses effects of foreign currency exchange rate over one-year time horizon on the investment.
Buying stocks in foreign markets can be challenging. Brokers don’t always have access to specific markets, and cannot perform certain trades. When stockbrokers are able to execute the trade, reporting and clearing times may be longer. Also, the safekeeping of the shares might not be protected against fraud or theft, if the bank or brokerage firm goes under. (Seabury, Chris).
Currencies are subject to fluctuating exchange rates. The fluctuation is normally determined by market supply and demand. Non-fixed exchange rates can increase or reduce the returns on the foreign currency (JPY) denominated holding. Assuming the stock price stays the same, if the foreign currency rises, this will increase the investment return. If the foreign currency (JPY) declines, the return will decrease.
Stock markets can be volatile with rapid changes in share values. These price fluctuations are not based on the solidity of the organization backing them up but by political, social or governmental issues in the home country of the corporation. (Sahoo, Ganeswar) Equity investments are a good example of taking on higher risk of loss in return.
On the other hand, investing in debt is a risky affair as well. This is because bonds are subject to Currency risk and volatility just as equity. The risk arises from the currency of denomination of the bond and the location of the investor. Depreciation in the foreign currency (JPY), for which the bond is issued at, as witnessed in the last one year will adversely affect the total returns of the bond. Bond market historically experiences fewer price changes, for better or worse, than stocks. Also, in case a corporation is liquidated, bondholders are paid first. Bonds may give the investor regular returns until the bond term ends.
Even though foreign debt and foreign equity appear to be faced with similar challenges, it would be prudent to invest in debt (bonds). This is because bonds have a more predictable yield hence less risky to invest compared to equity.
|Currency||Today’s Date||Spot Rate One Year ago||Spot Rate Today|
- USD 1,000 to JPY
Spot rate = JPY104.25/$
=1,000 * 104.25
= JPY 104,250
- JPY 104,250 to USD
Spot rate = JPY114.01/$
= 104,250/ 114.01
= USD 914.39
- Japanese Yen has depreciated against the US Dollar over the last one year fromJPY104.25/$ to 01/$.
- Percentage change:
= (104.25−114.01) / 114.01×100
JPY Depreciated 8.56% Relative to USD
Seabury, Chris. “Playing It Safe In Foreign Stock Markets.” Investopedia, 2017, http://www.investopedia.com/articles/stocks/09/playing-foreign-markets-safely.asp.
Sahoo, Ganeswar. “International Capital Flows: An Empirical Study Of The Relationship Between Equity And Debt Investments.” SSRN Electronic Journal, 2009, Elsevier BV, doi:10.2139/ssrn.1691283.
MBA 711 Business Brief Rubric
At the graduate level, the emphasis in grading is on the content, context and/or process of assignments.
|Points for Expected Graduate Performance
Assignment Meets All Requirements
|Points for Superior Graduate Performance
Assignment Significantly Exceeds Requirements
|Points Earned and Comments|
|Content: All of the requirements are met in the assignment; central issue or main ideas are defined and addressed; content is correct and of high quality.
|Analysis/Synthesis: The information is understood and integrated well. It synthesizes relevant information and materials to provide evidence of critical thought.||25-26||30||29|
|Mechanics: Follows APA guidelines and correct grammar, sentence structure, and word choice was used. The paper is free of typographical and spelling errors. Considered holistically, demonstrates the ability to write at the graduate level. Paper submitted to Turnitin.com (if required) and appropriate revisions made.||12-13||15||14|