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CHAPTER 13 INTERNATIONAL EQUITY MARKETS

ANSWERS & SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS

QUESTIONS

1. Exhibit 13.11 presents a listing of major national stock market inexes as ispla!e ail! in

the print eition of the Financial Times. "t ###.ft.com !o$ can fin an online tracking of these

national stock market inexes that sho#s performance o%er the past a!& month& an !ear. 'o

to this #ebsite an compare the performance for se%eral stock market inexes from %ario$s

regions of the #orl. (o# oes the performance compare) *hat o !o$ think acco$nts for

ifferences)

 "ns#er+ This ,$estion is esigne to pro%ie an int$iti%e $nerstaning of the benefits from

international i%ersification of e,$it! portfolios. O%er ifferent time perios& ifferent market

forces #ill affect each national market in $ni,$e #a!s. Some markets #ill ha%e !iele a

positi%e ret$rn an others a negati%e ret$rn. -onse,$entl!& since all markets #ill not ha%e

mo%e in $nison& i.e.& are not perfectl! correlate& international i%ersification pro%ies %olatilit!

re$ction to the portfolio in%estor.

. "s an in%estor& #hat factors #o$l !o$ consier before in%esting in the emerging stock

market of a e%eloping co$ntr!)

 "ns#er+ "n in%estor in emerging market stocks nees to be concerne #ith the epth of the

market an the market/s li,$iit!. 0epth of the market refers to the opport$nities to in%est in the

co$ntr!. One meas$re of the epth of the market is the concentration ratio of a co$ntr!/s stock

market. The concentration ratio fre,$entl! is calc$late to sho# the market %al$e of the ten

largest stocks trae as a fraction of the total market capitaliation of all e,$ities trae. The

higher the concentration ratio& the less eep is the market. That is& most %al$e is concentrate

in onl! a fe# companies. *hile this oes not necessaril! impl! that the largest stocks in theemerging market are not goo in%estments& it oes& ho#e%er& s$ggest that there are fe#

opport$nities for in%estment in that co$ntr! an that proper i%ersification within the co$ntr! ma!

be iffic$lt. In terms of li,$iit!& an in%estor #o$l be #ise to examine the market t$rno%er ratio

of the co$ntr!/s stock market. (igh market t$rno%er s$ggests that the market is li,$i& or that

there are opport$nities for p$rchasing or selling the stock ,$ickl! at close to the c$rrent market

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price. This is important beca$se li,$iit! means !o$ can get in or o$t of a stock position ,$ickl!

#itho$t spening more than !o$ intene on p$rchase or recei%ing less than !o$ expecte on

sale.

3. -ompare an contrast the %ario$s t!pes of seconar! market traing str$ct$res.

 "ns#er+ There are t#o basic t!pes of seconar! market traing str$ct$res+ ealer an agenc!.

In a ealer market& the ealer ser%es as market maker for the sec$rit!& holing an in%entor! of 

the sec$rit!. The ealer b$!s at his bi price an sells at his aske price from this in%entor!. "ll

p$blic traes go thro$gh the ealer. In an agenc! market& p$blic traes go thro$gh the agent

#ho matches it #ith another p$blic trae. 2oth ealer an agenc! markets can be contin$o$s

trae markets& b$t noncontin$o$s markets ten to be onl! agenc! markets. O%ertheco$nter 

traing& specialist markets& an a$tomate markets are t!pes of contin$o$s market traing

s!stems. -all markets an cro# traing are each t!pes of noncontin$o$s traing market

s!stems. -ontin$o$s traing s!stems are esirable for acti%el! trae iss$es& #hereas call

markets an cro# traing offer a%antages for smaller markets #ith man! thinl! trae iss$es

beca$se the! mitigate the possibilit! of sparse orer flo# o%er short time perios.

4. 0isc$ss an! benefits !o$ can think of for a compan! to 5a6 crosslist its e,$it! shares on

more than one national exchange& an 5b6 to so$rce ne# e,$it! capital from foreign in%estors as

#ell as omestic in%estors.

 "ns#er+ " 7N- that has a pro$ct market presence or man$fact$ring facilities in se%eral

co$ntries ma! crosslist its shares on the exchanges of these same co$ntries beca$se there is

t!picall! in%estor eman for the shares of companies that are kno#n #ithin a co$ntr!.

 "itionall!& a compan! ma! crosslist its shares on foreign exchanges to broaen its in%estor 

base an therefore to increase the eman for its stock. "n increase in eman #ill generall!

increase the stock price an impro%e its market li,$iit!. " broaer in%estor base ma! also

mitigate the possibilit! of a hostile takeo%er. "itional& crosslisting a compan!/s sharesestablishes name recognition an th$s facilitates so$rcing ne# e,$it! capital in these foreign

capital markets.

8. *h! might it be easier for an in%estor esiring to i%ersif! his portfolio internationall! to b$!

epositor! receipts rather than the act$al shares of the compan!)

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 "ns#er+ " epositor! receipt can be p$rchase on the in%estor/s omestic exchange. It

represents a package of the $nerl!ing foreign sec$rit! that is price in the in%estor/s local

c$rrenc! an in a traing range that is t!pical for the in%estor/s marketplace. The in%estor can

p$rchase a epositor! receipt irectl! from his omestic broker& rather than ha%ing to eal #ith

an o%erseas broker an the necessit! of obtaining foreign f$ns to make the foreign stock

p$rchase. "itionall!& i%iens are recei%e in the local c$rrenc! rather than in foreign f$ns

that #o$l nee to be con%erte into the local c$rrenc!.

9. *h! o !o$ think the empirical st$ies abo$t factors affecting e,$it! ret$rns basicall!

sho#e that omestic factors #ere more important than international factors& an& seconl!& that

in$strial membership of a firm #as of little importance in forecasting the international

correlation str$ct$re of a set of international stocks)

 "ns#er+ *hile national sec$rit! markets ha%e become more integrate in recent !ears& there is

still a tremeno$s amo$nt of segmentation that brings abo$t the benefit to be eri%e from

international i%ersification of financial assets. 7onetar! an fiscal policies iffer among

co$ntries beca$se of ifferent economic circ$mstances. The economic policies of a co$ntr!

irectl! affect the sec$rities trae in the co$ntr!& an the! #ill beha%e ifferentl! than sec$rities

trae in another co$ntr! #ith other economic policies being implemente. (ence& it is not

s$rprising that omestic factors are fo$n to be more important than international factors inaffecting sec$rit! ret$rns. Similarl!& in$strial acti%it! #ithin a co$ntr! is also affecte b! the

economic policies of the co$ntr!: th$s firms in the same in$str! gro$p& b$t from ifferent

co$ntries& #ill not necessaril! beha%e the same in all co$ntries& nor sho$l #e expect the

sec$rities iss$e b! these firms to beha%e alike.

;<O2=E7S

1. On the Tok!o Stock Exchange& (ona 7otor -ompan! stock close at >3&?48 per share onTh$rsa!& "pril 11& @13. (ona traes as an "0< on the NASE. One $nerl!ing (ona

share e,$als one "0<. On "pril 11& @13& the >BC spot exchange rate #as >??.D@BC1.@@.

a. "t this exchange rate& #hat is the noarbitrage U.S. ollar price of one "0<)

b. 2! comparison& (ona "0<s trae at C3?.?. 0o !o$ think an arbitrage opport$nit! exists)

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Sol$tion+

a. The noarbitrage "0< U.S. ollar price is+ >3&?48 F ??.D@ G C3?.8.

b. It is $nlikel! that an arbitrage opport$nit! exists after transaction costs. "itionall! the slight

ifference in prices is likel! acco$nte for b! a ifference in information containe in prices since

the Tok!o Stock Exchange closes se%eral ho$rs before the NASE. The a!s traing range for 

(ona "0< on the NASE #as C3?.48HC4@.18: the noarbitrage price #as insie this range.

. If (ona "0<s #ere traing at C44 #hen the $nerl!ing shares #ere traing in Tok!o at

 >3&?48& #hat co$l !o$ o to earn a traing profit) Use the information in problem 1& abo%e& to

help !o$ an ass$me that transaction costs are negligible.

Sol$tion+ "s the sol$tion to problem 1 sho#s& the noarbitrage "0< U.S. ollar price is C3?.8.

If (ona "0<s #ere traing at C44& a #ise in%estor might sell short the relati%el! o%er%al$e

 "0<s. Since the "0<s are a eri%ati%e sec$rit!& one #o$l expect the "0<s to ecrease in

price from C44 to C3?.8. "ss$ming this happens& the position co$l be li,$iate for a profit of 

C44 C3?.8 G C4.4D per "0<.

7INI -"SE+ S"N ;I-O/S NE* STO- EJ-("N'E

San ;ico is a rapil! gro#ing =atin "merican e%eloping co$ntr!. The co$ntr! is blesse

#ith miles of scenic beaches that ha%e attracte to$rists b! the tho$sans in recent !ears tone# resort hotels finance b! joint %ent$res of San ;ico b$sinessmen an mone!men from the

7ile East& Kapan& an the Unite States. "itionall!& San ;ico has goo nat$ral harbors that

are con$ci%e for recei%ing importe merchanise from abroa an exporting merchanise

pro$ce in San ;ico an other s$rro$ning co$ntries that lack access to the sea. 2eca$se of 

these a%antages& man! ne# b$sinesses are being starte in San ;ico.

;resentl!& stock is trae in a crampe b$iling in =a -obijio& the nation/s capital.

 "mittel!& the San ;ico Stock Exchange s!stem is rather archaic. T#ice a a! an official of the

exchange #ill call o$t the name of each of the 43 companies #hose stock traes on theexchange. 2rokers #anting to b$! or sell shares for their clients then attempt to make a trae

#ith one another. This cro# traing s!stem has #orke #ell for o%er one h$nre !ears& b$t

the go%ernment esires to replace it #ith a ne# moern s!stem that #ill allo# greater an more

fre,$ent opport$nities for traing in each compan!& an #ill allo# for traing the shares of the

man! ne# start$p companies that are expecte to trae in the seconar! market. "itionall!&

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the go%ernment aministration is rapil! pri%atiing man! stateo#ne b$sinesses in an attempt

to foster their efficienc!& obtain foreign exchange from the sale& an con%ert the co$ntr! to a

more capitalist econom!. The go%ernment belie%es that it co$l con$ct this pri%atiation faster 

an perhaps at more attracti%e prices if it ha a moern stock exchange facilit! #here the

shares of the ne#l! pri%atie companies #ill e%ent$all! trae.

Ao$ are an expert in the operation of seconar! stock markets an ha%e been retaine as a

cons$ltant to the San ;ico Stock Exchange to offer !o$r expertise in moerniing the stock

market. *hat #o$l !o$ a%ise)

S$ggeste Sol$tion to San ;ico/s Ne# Stock Exchange

7ost ne# an reno%ate stock exchanges are being establishe these a!s as either a

partiall! or f$ll! a$tomate traing s!stem. " f$ll! a$tomate s!stem is especiall! beneficial for 

a small to mei$m sie co$ntr! in #hich there is onl! moerate traing in most iss$es. S$ch a

s!stem that eser%es special note is the contin$o$s National Integrate 7arket s!stem of Ne#

Lealan. This s!stem is f$ll! comp$terie an oes not re,$ire a ph!sical str$ct$re.

Essentiall!& all b$!ers an sellers of a stock enter thro$gh their broker into the comp$ter s!stem

the n$mber of shares the! esire to b$! or sell an their re,$ire transaction price. The s!stem

is $pate constantl! as ne# p$rchase or sale orers are entere into the s!stem. The

comp$ter constantl! searches for a match bet#een b$!er an seller& an #hen one is fo$n a

transaction takes place. This t!pe of s!stem #o$l likel! ser%e San ;ico/s nees %er! #ell.There is existing technolog! to implement& the b$gs ha%e been #orke o$t in other co$ntries&

an it #o$l satisf! all the emans of the San ;ico go%ernment an easil! accommoate

gro#th in market acti%it!.